May 12, 2016

Enterprise Products Partners’ Economic Reality Is Severely Distorted By As-Reported Numbers


Summary

  • Using Adjusted Earnings and Assets, EPD’s Adjusted Return on Assets was 9% in 2015 – over twice the traditional 4% ROA most financial databases report.
  • This difference is primarily caused by EPD’s $5.7bn goodwill and $4.0bn in other intangibles, which significantly distort the firm’s economic reality.
  • Also of note is the difference between EPD’s Adjusted Forward Value to Earnings ratio of 22.9x versus the firm’s traditional forward P/E of only 18.0x.

EPD - 2016 05 05

Performance and Valuation Prime™ Chart

Under GAAP, the as-reported financial statements and financial ratios of EPD do not reflect economic reality. The traditional ROA computation understates the company’s profitability by incorrectly including certain items. The distortion of both profitability measures and valuation metrics of EPD are primarily driven by the inclusion of the firm’s goodwill ($5.7bn) and other intangibles ($4.0bn), which inflate the firm’s asset base, and by incorrectly expensing operating leases ($104mn).

After adjusting for similar issues and a host of other GAAP-based miscategorizations, Valens calculates EPD’s Adjusted Return on Assets as 9% in 2015. In contrast, most financial databases show a traditional ROA of only 4%. Additionally, our analysis shows that EPD has an Adjusted Forward P/E of 22.9x, compared to the firm’s traditional forward P/E at 18.0x. The profitability of EPD’s operations and their equity’s true value are therefore not what traditional metrics originally indicate.


Click here to read the article in its entirety at Seeking Alpha.