Targa Resources Corp. (TRGP), engaged in developing complementary domestic midstream infrastructure assets, reported mixed fiscal 2024 second-quarter results. The company posted revenue of $3.56 billion, missing the analysts’ expectations of $4.47 billion. Also, its income from operations decreased 3.4% from the prior-year quarter to $627.20 million.

However, TRGP has gained in the year-to-date period, when its stock rose by 75.2%. Such price changes allow investors to benefit substantially. Over the past six months, TRGP’s shares have soared 39.5% and 78.8% over the past year to close its last trading session at $152.21.

Also, with the anticipation of ongoing withdrawals from global oil inventories likely to push crude oil prices back above $80/b in September and positive natural gas price movement expected in 2025, the prospects for TRGP are solid.

During the second quarter, Targa commenced operations at its new 230 MMcf/d Roadrunner II plant in Permian Delaware, along with its new 120 MBbl/d Train 9 fractionator in Mont Belvieu, TX. It also expects to start operations on the reactivation of Gulf Coast Fractionators in Mont Belvieu during the third quarter. Also, TRGP is on track to complete its planned expansions, as previously disclosed.

Also, for the second quarter, TRGP’s board of directors declared a quarterly cash dividend of $0.75 per common share for the second quarter of 2024. The dividend was paid on August 15, 2024, on all outstanding common shares to holders of record as of the close of business on July 31, 2024.

Buoyed by its volume growth, the company raised its 2024 outlook. TRGP now expects to generate adjusted EBITDA between $3.95 billion and $4.05 billion, reflecting a 5% increase from its previous estimate.

Let’s look at factors that could influence TRGP’s performance in the upcoming months.

Mixed Financials

For the second quarter that ended June 30, 2024, TRGP’s total revenues increased 4.6% year-over-year to $3.56 billion. However, its income from operations declined 3.4% year-over-year to $627.20 million. Also, net income attributable to TRGP came in at $298.50 million, down 9.4% from the prior year’s quarter.

Furthermore, the company’s adjusted EBITDA of $984.30 million reflects growth of 24.7% year-over-year. And its adjusted cash flow from operations improved 30% from the year-ago value.

Positive Historical Growth

TRGP’s revenue grew at a CAGR of 11.5% over the past three years, while its EBITDA improved at a CAGR of 21.1%. Its EBIT increased at a CAGR of 23.7% over the same period, while the company's net income and EPS grew at respective CAGRs of 53% and 78.3% over the same time frame.

Furthermore, the company’s normalized net income and total assets have improved at CAGRs of 29.6% and 52.4% over the same timeframe, respectively.

Favorable Analyst Estimates

Analysts expect TRGP’s revenue for the third quarter (ending September 2024) to come in at $4.33 billion, indicating an increase of 11.2% year-over-year. The consensus EPS estimate of $1.52 for the same period reflects a 56.6% year-over-year improvement.

For the fiscal year 2024, the company’s revenue and EPS are anticipated to grow 15.1% and 54.5% year-over-year to $18.49 billion and $5.66, respectively. In addition, Street expects its revenue and EPS for the fiscal year 2025 to grow 20.1% and 27.8% from the previous year to $22.21 billion and $7.23, respectively.

Unfavorable Profitability

TRGP’s trailing-12-month EBIT margin of 14.80% is 30.4% lower than the 21.27% industry average. Its trailing-12-month net income margin of 6.72% is 42.6% lower than the industry average of 11.72%. Also, the stock’s trailing-12-month levered FCF of 0.95% is considerably lower than the industry average of 6.59%.

Furthermore, the stock’s trailing-12-month ROCE and ROTA of 41.40% and 5.14% are unfavorable compared to the 13.14% and 5.46% industry average, respectively.

Elevated Valuation

In terms of forward non-GAAP P/E, TRGP is currently trading at 24.89x, 112.3% higher than the industry average of 11.72x. Similarly, the stock’s forward EV/Sales and EV/EBITDA of 2.63x and 12.19x are considerably higher than the industry average of 1.95x and 6.01x, respectively.

Additionally, the stock’s forward Price/Sales and Price/Cash Flow of 1.80x and 10.47x are 24.5% and 93.9% higher than the industry averages of 1.45x and 5.40x, respectively.

POWR Ratings Reflect Uncertainty

TRGP’s mixed outlook is reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral in our proprietary system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. TRGP has a B grade for Sentiment, consistent with its optimistic analyst estimates.

However, it also has an F grade for Value, consistent with its elevated valuation.

TRGP is ranked #17 among the 23 stocks in the A-rated MLPs – Oil & Gas industry.

Beyond what I have stated above, we have also given TRGP grades for Momentum, Growth, Stability and Quality. Get access to all the TRGP ratings here.

Bottom Line

TRGP is a leading company engaged in the oil & gas sector, but its last reported financial results raise concerns. Although the company’s long-term prospects appear promising, driven by the expansion in production capacity, strategic alliances, and investments, there could be significant volatility in the near-term performance.

Given TRGP’s mixed profitability and elevated valuation, waiting for a better entry point in this stock seems prudent.

Stocks to Consider Instead of Targa Resources Corp. (TRGP)

Given its near-term uncertain prospects, the odds of TRGP outperforming in the weeks and months ahead are compromised. However, there are many industry peers with much more impressive POWR Ratings. So, consider these A (Strong Buy) or B (Buy) stocks from the MLPs – Oil & Gas industry instead:

Star Group L.P. (SGU)

Summit Midstream Partners, LP Common Limited Partner Interests (SMLP)

Delek Logistics Partners L.P. (DKL)

For exploring more A and B-rated oil & gas stocks, click here.

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

TRGP shares were trading at $152.83 per share on Friday afternoon, up $0.62 (+0.41%). Year-to-date, TRGP has gained 79.10%, versus a 20.31% rise in the benchmark S&P 500 index during the same period.

Rajkumari started her career as a writer but gradually shifted her focus to financial journalism, leveraging her educational background in Commerce. Fascinated by the interplay of business and economic shifts in equities, she aspires to evolve as an analyst. With a knack for simplifying complex financial concepts, her mission is to empower investors with insights that lead to profitable decisions.

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