On Monday, Wolfe Research maintained a Peer Perform rating on TC Energy Corporation (NYSE:TRP) stock, highlighting the company's strong fundamentals but cautioning on its current valuation. The firm's analysis pointed to TC Energy's successful South Bow spin last week, which led to a quick revaluation of the stock, largely driven by enthusiasm around data centers and a dip in interest rates.
The analyst noted that TC Energy's stock now commands the highest multiple within their coverage, making it challenging to justify further upside potential. Despite the company's attractive asset base, which is primarily centered around natural gas, and its limited exposure to power, concerns were raised regarding the balance sheet being over-leveraged.
Additionally, the company's exposure to Mexico, which accounts for 15% of its business, is considered high for a company with a premium valuation.
TC Energy's run-rate growth may be hindered by limited financial flexibility, according to Wolfe Research. The firm employs a Sum of The Parts (SOTP) EV/EBITDA methodology to evaluate the company's fair value, using 2026 estimates.
Different segments of TRP's business are broken down and valued based on various characteristics. For instance, the Canadian gas pipelines segment is assigned an 11.75-12.25x EBITDA multiple, reflecting its regulated nature and a new five-year settlement term.
The U.S. gas pipelines are valued at 11.25x-11.75x EBITDA, a robust multiple that considers the potential linked to rising electric demand. The Mexico gas pipelines business is given a 9.5-10.0x multiple, acknowledging reduced construction risk but also higher country risk. The energy segment, which includes the regulated Bruce Power and some lower multiple natural gas generation, is assigned an 11.0-12.0x multiple.
Taking into account these valuations and adjustments for interests and debts in various joint ventures and partnerships, Wolfe Research has set a fair value range for TC Energy's shares at $41-45.
This valuation incorporates adjustments for Global Infrastructure Partners' (GIP) interest in the Columbia pipelines' cash flows, GIP's share of the debt at the joint venture, the CFE's 13% interest in TNGH and Southeast Gateway, and the Alberta Indigenous Opportunities Corp's pending interest in the NGTL and Foothills systems.
In other recent news, TC Energy has been making strategic moves that are reshaping its business and financial outlook. The company has decided to spin off its Liquids Pipelines business into a new entity, South Bow Corporation, a move that has been met with mixed reactions from analysts.
BMO Capital Markets has revised its price target for TC Energy, reducing it to C$55.00 from C$65.00, while maintaining a Market Perform rating. In contrast, UBS has upgraded TC Energy's stock to Buy, anticipating a more favorable valuation following the spin-off.
The spin-off is expected to decrease TC Energy's total debt by approximately $8 billion, according to UBS. This strategic repositioning has also resulted in TC Energy leaning more heavily towards natural gas pipelines, which now represent about 90% of its business.
Recent developments for TC Energy also include the successful completion of the sale of the Portland Natural Gas Transmission System for a gross purchase price of $1.14 billion. This sale is part of the company's strategic plan to reach a $3 billion asset divestiture target by 2024.
TC Energy has reported a 9% year-over-year increase in comparable EBITDA for the second quarter of 2024 and plans to introduce approximately $7 billion in assets in 2024 and $9 billion in 2025.
Other notable developments include the shareholder approval of the South Bow spinoff, a landmark Indigenous Equity Ownership agreement in Canada, and exploration of opportunities in the data center industry.
However, the company's earnings per common share are projected to be lower due to ongoing asset divestiture. These are the recent developments at TC Energy.
InvestingPro Insights
TC Energy Corporation's recent performance and financial metrics offer additional context to Wolfe Research's analysis. According to InvestingPro data, TC Energy has a market capitalization of $46.8 billion and a P/E ratio of 18.51, which aligns with the analyst's observation of the company's high valuation relative to its peers.
The company's strong fundamentals are reflected in its revenue growth of 8.89% over the last twelve months and an impressive EBITDA growth of 9.49% during the same period. These figures support the analyst's view on TC Energy's attractive asset base and successful operations.
InvestingPro Tips highlight that TC Energy has raised its dividend for 23 consecutive years and has maintained dividend payments for 52 consecutive years. This consistent dividend history, coupled with a current dividend yield of 6.32%, underscores the company's commitment to shareholder returns, which may contribute to its premium valuation.
However, the InvestingPro Tips also indicate that short-term obligations exceed liquid assets, which aligns with Wolfe Research's concerns about the company's over-leveraged balance sheet. This factor could indeed limit TC Energy's financial flexibility for future growth, as suggested in the analysis.
The stock's recent performance has been notably strong, with a 32.74% price total return over the last three months and a 58.55% return over the past year. This aligns with the analyst's observation of the stock's quick revaluation following the South Bow spin and market enthusiasm.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips for TC Energy, providing a deeper insight into the company's financial health and market position.
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