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Stock Strategist

Too Much Gas in This Stock's Price

A propane price spike and enthusiasm for near-term margins have made the market overly optimistic about this pipeline firm.

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Despite some of the enthusiasm we hear for  Pembina Pipeline (PBA)/(PPL) and its 3.8% yield--as measured by ever-increasing price targets from some of our peers--we continue to view the shares as overvalued.

Our $32 and CAD 36 fair value estimates are based on a 50/50 blend of a discounted cash flow model and expected dividend stream. The DCF values Pembina at $31 or CAD 34 per share, while the dividend stream values it at $33 or CAD 37 per share and assumes 4% annual growth to 2018 and 5% thereafter. In this Stock Strategist, we want to review first-quarter results and then provide additional commentary on Pembina's valuation and what we think it would take for the current share price to match a possible valuation scenario.

David McColl does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.