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Bull of the Day: Tallgrass Energy (TEGP)

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Saudi Arabia, other OPEC members, and non-OPEC allies like Russia appear likely to abide by previously-accepted supply cuts until at least the end of 2018, delaying concerns that some oil leaders would be increasing production to offset the effect of shortfalls from Iran and Venezuela. Oil stocks are looking strong again, and that means investors might want to give Tallgrass Energy TEGP a look.

Headquartered in Leadwood, Kansas, Tallgrass Energy is engaged in the transportation, storage and processing of oil and natural gas. It also provides a water services business to the oil and gas exploration and production industry.

Positive news from OPEC likely has investors searching for strong oil stocks, and with TEGP currently sporting a Zacks Rank #1 (Strong Buy) and a “B” grade in the VGM category of our Style Scores system, this is clearly one of the best available options right now.

Latest Outlook and Valuation

Things have been trending in the right direction for Tallgrass recently, with the stock adding about 5% in the past month and the company able to surpass earnings estimates by more than 26% in the most recent quarter.

Tallgrass’ forward-looking outlook is also improving. The Zacks Consensus Estimate for its full-year earnings has moved six cents higher in the past month, and its 2019 EPS projection has added 24 cents in that time. Meanwhile, the Most Accurate Estimates for these periods—which look at only the most recent analyst estimates—sit 20% higher than their respective consensus estimates.

Positive estimate revisions and strong recent estimates imply that analysts are more bullish about TEGP now than they were just a short time ago. This sentiment should inspire continued momentum for the stock and certainly indicates good news about the company’s current business.

Investors should also note that TEGP is trading with a respectable P/E of 18.8. This is basically in line with the average of our “Energy and Pipeline – MLPs” industry. Energy investors also love to look at the P/B ratio, which compares a stock’s price with a company’s book value.

TEGP currently has a P/B ratio of 1.8, which is a noticeable discount to its industry’s average of 2.1. The P/B is useful for energy companies with large amounts of equipment and materials, so it is nice to see that TEGP looks undervalued here.

It should also be noted that TEGP is generating cash flow growth of 18% right now, outpacing its own historical average of 14%. Earnings are projected to improve by nearly 50% this year, and revenue is expected to surge 12%. All of these metrics help the stock earn a “B” grade for Growth in our Style Scores system.

Bottom Line

Oil was a volatile space for years, but global oil inventories have already returned to their five-year average, and despite concerns that Saudi Arabia, Russia, and others might increase production soon, it does not appear that investors have much to fear for at least the remainder of the year. This means scooping up some oil stocks is a prudent move right now.

There are plenty of great options in the energy sector, but it is clear that an improving outlook, attractive valuations, and strong growth metrics make TEGP a uniquely strong pick. Finally, investors will also notice that TEGP’s status as an MLP means it pays a juicy 9% dividend.

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