On Thursday, Wolfe Research adjusted its stance on Williams Companies (NYSE:WMB), downgrading the stock from Peer Perform to Underperform and setting a price target of $34.00.
The firm highlighted that while Williams Companies presents an attractive investment opportunity in gas infrastructure amid growing power demand from data centers, the natural gas market's oversupply and production cuts could disproportionately impact the company due to its significant gathering and processing (G&P) business, which is sensitive to volume changes.
The research firm noted that Williams Companies' valuation appears stretched, particularly when compared to its peers in the U.S. midstream sector. The stock is currently trading at the highest enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple among its peers and is on par with companies like TransCanada Corporation (TRP) and Enbridge (NYSE:ENB), which traditionally command higher premiums.
Additionally, Williams Companies' price-to-earnings (P/E) multiple of 19x is significantly higher than that of regulated U.S. electric utilities, which are considered a more direct play on the increasing electric demand from data centers.
Wolfe Research's valuation approach involves a sum-of-the-parts analysis with target EV/EBITDA multiples based on their 2025 estimates. They have applied an 11.5x multiple to the company's gas transmission segment, primarily due to the strategic Transco pipeline, which is known for its high returns on capital and robust customer base.
The G&P segment is valued at an 8.5x EBITDA multiple, slightly above the average for other companies, reflecting Williams Companies' strong position in the Appalachia region.
For the Deepwater segment, a 9.5x multiple was used, which is expected to command a premium over onshore G&P due to its long-term, cost-based contracts with major energy firms. After accounting for noncontrolling interests and imputed debt of equity investments, the overall valuation framework suggests a target 9.7x EV/EBITDA multiple for Williams Companies, leading to the $34.00 per share price target.
InvestingPro Insights
Amid the discussion of Williams Companies' (NYSE:WMB) financials and Wolfe Research's downgrade, it's crucial to consider the latest InvestingPro data and tips to gain a more comprehensive understanding of the company's current market position. With a market capitalization of $45.91 billion, Williams Companies trades at a P/E ratio of 14.44, which is more favorable compared to the P/E multiple of 19x cited by Wolfe Research. Additionally, the adjusted P/E ratio for the last twelve months as of Q4 2023 stands at 16.4.
InvestingPro Tips highlight that Williams Companies has a track record of raising its dividend for 6 consecutive years and maintaining dividend payments for 51 consecutive years. These consistent dividend payments may appeal to income-focused investors. Moreover, 2 analysts have revised their earnings upwards for the upcoming period, indicating potential optimism about the company's performance. Despite a revenue decline of 12.34% over the last twelve months as of Q4 2023, the company's EBITDA growth of 24.86% during the same period suggests operational efficiency improvements.
For readers looking to delve deeper into Williams Companies' financial health and future prospects, InvestingPro offers additional insights and analysis. To enhance your investment research with more InvestingPro Tips, visit https://www.investing.com/pro/WMB and consider using the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. There are 5 more InvestingPro Tips available that could provide further clarity on Williams Companies' investment potential.
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