Macquarie Infrastructure Company (NYSE:MIC) owns and operates a small handful of infrastructure assets in the U.S. This asset base is costly to run and maintain, but consists of relatively basic services whose cash flows are predictable. This, combined with an appealing valuation and potential to reward investors with an increased dividend make the stock worth a close look.
TUTORIAL: The Industry Handbook: The Oil Services Industry
Second Quarter Recap
Total reported revenue jumped nearly 21% to $247.2 million. Macquarie Infrastructure operates three but disparate divisions. The first is a 50% equity interest in New Jersey-based International-Matex Tank Terminals, or IMTT, that operates a bulk liquid storage terminal business that stores petroleum products and an array of chemicals. It saw sales advance almost 12%. Macquarie's gas company is the only regulated utility in the Hawaiian Islands and saw sales jump 28%. It provides gas manufacturing as well as pipeline and unregulated gas distribution.
The third segment owns a collection of energy assets, including one in Chicago that provides air conditioning for high-rise buildings and heating and cooling services to three clients in Las Vegas. Macquarie has a 50.01% interest in this business and it saw sales fall nearly 7%. Finally, it owns Atlantic Aviation, which provides fuel and terminal services to 63 airports and a heliport in the U.S. This business reported nearly 24% sales growth during the quarter as it continues to recover from the credit crisis. (For more on the credit crisis, see Who Is To Blame For The Subprime Crisis?)
A 27.7% jump in operating expenses to $235.1 million and hefty interest expense of $19.9 million sent reported net income into negative territory at $2.5 million, or a loss of 5 cents per diluted share. However, operating cash flow fell only slightly but remained firmly positive at $41.3 million. Asset disposals more than offset quarterly capital expenditure and resulted in free cash flow of $42.6 million, or 93 cents per diluted share.
Analysts currently project full-year revenue growth in excess of 15% and total revenue of $970 million. The current consensus profit expectation is $3 per share. Macquarie also said it expects to generate $3 in free cash flow per share for all of 2010.
The Bottom Line
After suspending its dividend in February 2009 "to accelerate debt reduction" and deal with a down economy, Macquarie returned to paying a dividend during the first quarter. The quarterly dividend amounted to 20 cents per share and equates to a current annual dividend yield of 3.5%.
There is the potential for a significant dividend boost as Macquarie management is working with its partner in the IMTT investment to distribute excess capital that the business is generating. It believes it will be able to eventually see through an increased distribution, which could potentially boost the dividend yield closer to 6%.
Macquarie continues to be burdened by a heavy debt load, but this is common in the industry given infrastructure assets are expensive to build and maintain. Brookfield Asset Management (NYSE:BAM) also competes in the industry while real estate investment trusts (REITs) such as General Growth Properties (NYSE:GGP), the Howard Hughes Corporation (NYSE:HHC) and Simon Property Group (NYSE:SPG) must also invest in and run costly real estate assets.
Despite the high debt, Macquarie's case, its businesses beyond aerospace are relatively recession-resistant and generate stable cash flows. This, combined with increased dividend potential and a free cash flow multiple below 7, suggest the stock has considerable potential upside going forward. (For more on free cash flow, see Free Cash Flow: Free, But Not Always Easy.)
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