Wells Fargo Increasing Valuation Ranges Across MLP Coverage - Upgrades Magellan Midstream Partners as 'Top Pick'

October 22, 2009 7:05 AM EDT

Wells analyst says, "We are increasing valuation ranges across our MLP coverage universe by 12% (median). Our revised valuation ranges suggest MLPs still have moderate upside potential with an estimated median total return of 13% (target yield of 8.0% and 2010E distribution growth of 2.8%). Specifically, we are lowering the required rate of return (ROR) in our distribution discount models (DDM) by 100-200 bps in recognition of investors’ increased risk appetite. This more than offsets the impact of a 125 bps (median) reduction in our long-term growth rate forecast to account for the effects of the GP’s incentive distribution rights (IDRs). We are also increasing our median price/DCF multiple to 11x from 9.5x. As a result of our valuation adjustments, we are upgrading Magellan Midstream Partners, L.P. (NYSE: MMP) to Outperform from Market Perform."

"Large-Cap Pipeline MLPs Are Among The Best Risk Adjusted Opportunities In The Sector. We continue to believe this subsector represents among the best risk adjusted opportunities in the sector given the feebased, stable nature of their cash flows, the diversity and breadth of their assets, investment grade credit rating, and superior access to the capital markets. Largecap pipeline MLPs still provide investors with relatively robust (median) yields of 7.6%, visible distribution growth of 2.6% in 2010 supported by organic growth projects recently placed in-service, and a median 3-year CAGR of 3.3%, which should outpace inflation. Our revised valuation ranges suggest a median one-year total return potential of 16% and target yield of 7.5%, which is essentially in-line with the current median yield of 7.6%. Our top picks in this sub-sector include Enterprise Products Partners (NYSE: EPD) and MMP."

To see more analyst ratings on MMP Click Here.

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