Should You Buy ET Below $19?

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Hello! Today, I've brought this exciting topic to you! We're diving deep into the world of midstream energy to answer a question many investors are pondering: Should you buy Energy Transfer (ET) while it's below $19?

Energy Transfer LP (NYSE: ET) has seen its stock dip recently, falling over 10% this year even as the broader market rebounds. But as seasoned investors know, pullbacks can often signal fantastic buying opportunities for those with patience and a clear strategy. Let's break down if ET fits into your portfolio, no matter your investment style!

☆ Topic 1: A Resounding "YES" for Income Investors!

If you're an income investor, looking for steady cash flow and attractive yields, then Energy Transfer should definitely be on your radar. Currently, ET boasts a forward distribution yield of an impressive 7.49%. That's a serious income stream!

Now, you might recall that this Master Limited Partnership (MLP) did cut its distribution in 2020 amidst the initial chaos of the COVID-19 pandemic. However, here's where their resilience shines:

  • Quick Recovery: Within just two years, ET had not only restored its distribution to pre-cut levels but has since continued to increase it. This demonstrates a strong commitment to returning capital to shareholders.
  • Targeted Growth: Even better, Energy Transfer aims for annual distribution growth of between 3% and 5%. This means your income isn't just high now, it's expected to grow, helping combat inflation and grow your wealth over time.
  • Financial Fortitude: Can they deliver on this promise? All signs point to yes. The company is in its strongest financial position ever, with a leverage ratio in the lower half of its target range and solid distribution coverage. This financial health provides a strong foundation for continued payouts.

Example: Imagine investing in ET today. Not only are you getting a robust 7.49% yield, but with their targeted 3-5% annual growth, that income stream could grow from, say, $100 annually to $103-$105 next year, and continue expanding, providing a consistent and growing passive income for your portfolio.

☆ Topic 2: Another Affirmative Answer for Value Investors!

For those who love a good bargain and seek out companies trading below their intrinsic value, Energy Transfer offers compelling reasons to consider buying while its stock is under $19.

  • Discounted Price: The stock is currently trading approximately 17% below its 12-month high, suggesting it's on sale compared to its recent peak.
  • Attractive P/E Ratio: Energy Transfer's trailing 12-month price-to-earnings (P/E) ratio stands at 13. This is significantly below its historical average, even when factoring in volatile periods like the oil price collapses of 2015-2016 and the COVID-19 pandemic. A lower P/E often indicates a stock might be undervalued relative to its past performance.
  • Even Better Forward P/E: Looking ahead, its forward P/E ratio is an even more appealing 11. While this might be in line with other midstream peers, it suggests that the entire midstream industry is currently trading at attractive valuations, offering a sector-wide opportunity.
  • Industry-Leading EV-to-EBITDA: Where ET truly shines for value investors is its trailing 12-month enterprise value (EV)-to-EBITDA ratio. A recent company analysis showed ET's EV-to-EBITDA was the second-lowest in the entire midstream industry. This metric is a strong indicator of value, as it compares the total value of the company (market cap + debt - cash) to its earnings before interest, taxes, depreciation, and amortization. A lower ratio often points to a more attractive valuation.

Example: If you compare ET's current P/E of 13 to its historical average, you'll find that you're getting a slice of a profitable, essential infrastructure company at a price that's arguably cheaper than it has been in years, even accounting for market downturns. This indicates a potential margin of safety for value-focused investors.

☆ Topic 3: An Iffy Response for Growth Investors (But Still a Bonus!)

Now, if you're a pure-play growth investor chasing the next high-flying tech stock, Energy Transfer might not generate the same level of excitement. However, it's crucial not to mistake its "iffy" growth profile for "no growth." In fact, ET has solid, albeit more predictable, growth prospects that serve as a fantastic bonus for income and value investors.

  • Vast Infrastructure: Energy Transfer operates an immense network of over 130,000 miles of pipelines, transporting critical crude oil, natural gas, natural gas liquids (NGLs), and refined products across much of the U.S.
  • Stable Demand: Despite the rise of renewable energy, the demand for these traditional fuels is projected to increase in the coming years, providing a stable foundation for ET's operations.
  • Significant Capital Investments: The company isn't sitting still. They are heavily investing in future growth, with approximately $5 billion allocated for 2025 alone. These investments include:
    • Expanding processing facilities in the Permian Basin, a key U.S. energy hub.
    • Building the Hugh Brinson pipeline to transport natural gas from West Texas to existing pipelines near Dallas-Fort Worth.
    • Nearly completing the expansion of NGL export capacity at their Nederland terminal.
  • AI as a New Growth Driver: This is where it gets particularly interesting. The massive data centers required for Artificial Intelligence (AI) consume enormous amounts of electricity, much of which is generated using natural gas. Energy Transfer is directly capitalizing on this trend:
    • They are constructing eight 10-megawatt facilities in Texas specifically to support AI demand.
    • They have a long-term agreement with CloudBurst Data Centers to provide natural gas to their AI data center in central Texas.

Example: While ET isn't growing at the breakneck speed of, say, an AI software company like Nvidia, its strategic investments in expanding crucial energy infrastructure and directly supplying the energy needs of the booming AI sector provide a steady, reliable growth trajectory. This means your high yield and undervalued stock also come with a built-in growth engine from a surprising source.

☆ Questions

Q1. What makes Energy Transfer a strong consideration for income investors?
A. Energy Transfer stands out for income investors due to its high forward distribution yield of 7.49% and its commitment to consistent distribution growth (targeting 3%-5% annually) supported by a strong financial position and solid distribution coverage, even after recovering from a 2020 cut.

Q2. Is Energy Transfer currently undervalued based on common metrics?
A. Yes, for value investors, Energy Transfer appears attractive. Its trailing 12-month P/E ratio of 13 is well below its historical average, and its forward P/E of 11 is appealing. Most notably, its trailing 12-month EV-to-EBITDA ratio was recently identified as the second-lowest in the midstream industry, indicating a favorable valuation.

Q3. Does Energy Transfer have any significant growth prospects, especially given its traditional energy focus?
A. While not a "growth stock" in the tech sense, Energy Transfer has solid growth prospects driven by its extensive pipeline network, stable demand for fuels, and significant capital investments (e.g., Permian Basin expansion, new pipelines). A key emerging driver is its role in supplying natural gas to electricity-hungry AI data centers, with dedicated facilities and long-term agreements in place.

☆ Conclusion

So, should you buy Energy Transfer while it's below $19? My assessment is a resounding "yes" if you are an income or value investor. The high distribution yield, the company's strong financial health and commitment to distribution growth, combined with attractive valuation metrics, make ET a compelling choice. While its growth profile might not excite the purely growth-focused, the consistent expansion of its core infrastructure and its strategic pivot into supplying the burgeoning AI sector provide a substantial and reliable bonus. This is a stock that offers a fantastic blend of current income, value, and steady future potential.

Happy investing!