On Monday, CFRA lowered its rating on TC Energy (NYSE:TRP) from Hold to Sell and reduced the stock's price target from $45.00 to $40.00. The adjustment comes despite the company's operational momentum and a strong project backlog, as the analyst believes the stock's recent performance has pushed its valuation to near 10-year highs.
The revised price target is based on a 13 times multiple of the projected 2025 EBITDA, which is above TC Energy's historical forward average. This multiple gives some credit to the company for its robust pipeline of projects. However, the analyst pointed out that with shares having risen 33% this year, outperforming its Canadian midstream peers, the current multiples suggest that high expectations are already reflected in the stock price.
The downgrade is also influenced by the anticipated strain on the company's operating cash flows due to the dual demands of funding growth projects and maintaining dividend payments. As a result, the analyst has adjusted the earnings per share (EPS) estimates, lowering the 2024 projection by CAD$0.14 to CAD$4.18 and the 2025 forecast by CAD$0.59 to CAD$3.75.
TC Energy reported third-quarter earnings of CAD$1.03 per share, which exceeded the consensus by CAD$0.07. The company has been actively investing in its operations, with CAD$7.0 billion worth of projects put into service in 2024 and an additional CAD$8.5 billion expected to come online in 2025. Despite these investments and a dividend yield of 5.6%, the analyst's outlook remains cautious based on the stock's valuation.
In other recent news, TC Energy Corporation reported a 6% year-over-year increase in comparable EBITDA in its Q3 2024 earnings call, and is on track to meet the top end of its projected 2024 EBITDA outlook of $11.2 billion to $11.5 billion. The company successfully spun off its liquids pipelines business into South Bow earlier, and has placed significant capital projects into service throughout the year, with additional ones expected in 2025. TC Energy also declared a quarterly dividend of $0.8225 per share.
The company has an Investor Day scheduled for November 19, 2024, to discuss future opportunities. Analysts noted that TC Energy aims to achieve a debt-to-EBITDA ratio of 4.75 times by the end of 2024, and its growth strategy includes a $6 billion to $7 billion CapEx plan, focusing on projects with attractive risk-adjusted returns.
The Southeast Gateway project is nearing completion, with the in-service date expected by mid-2025. These are among the recent developments for TC Energy.
InvestingPro Insights
TC Energy's recent performance aligns with several key metrics from InvestingPro. The company's stock is trading near its 52-week high, with a strong return of 59.9% over the last year and an impressive 43.26% over the past six months. These figures support CFRA's observation of the stock's significant rise and outperformance compared to peers.
InvestingPro Tips highlight TC Energy's consistent dividend history, having raised its dividend for 23 consecutive years and maintained payments for 52 years. This track record underscores the company's commitment to shareholder returns, even as CFRA expresses concerns about the strain on cash flows to fund both growth projects and dividends.
The current P/E ratio of 15.74 (adjusted for the last twelve months) suggests a relatively high valuation, corroborating CFRA's view that high expectations are priced into the stock. Additionally, TC Energy's revenue growth of 11.16% over the last twelve months and an EBITDA growth of 10.72% reflect the operational momentum mentioned in the article.
For investors seeking a more comprehensive analysis, InvestingPro offers 11 additional tips for TC Energy, providing a deeper understanding of the company's financial health and market position.
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