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Is the APA Group share price overvalued?

The APA Group (ASX: APA) has had a cracking year so far – with APA shares running from $8.53 in January to the $10.71 price we see today (a YTD gain of more than 25%). But… on APA’s current share price, the stock is trading at over 46 times earnings, which is well above the market average of around 18. So are APA shares overvalued at current prices? Or is the market placing an appropriate premium on this stock? Let’s take a look at APA and see what’s under the hood.

Who is APA?

APA Group is a company that owns and operates energy infrastructure – mainly natural gas pipelines and electricity generation assets. APA owns a 7,600km East Coast gas distribution grid as well as pipelines in Central and Western Australia, forming the backbone of Australian gas infrastructure. The company also participates in gas compression, processing and storage as well as operating several gas-fired power plants – making APA a highly vertically integrated business.

APA also has a growing presence in renewable power generation, owning stakes in the Emu Downs Wind Farm (north of Perth, WA) and North Brown Hill Wind Farm (north of Adelaide, SA) in conjunction with AGL Energy Limited (ASX: AGL).

What’s to like about APA?

So as we can see, APA is a highly defensive business – meaning that it is resistant to any economic downturns or crashes. We all need gas to cook and electricity to live after all. APA has some pleasing numbers behind it to boot. The company (in its 1H19 results) reported revenue growth of 4.1%, earnings growth of 4.3% and profit growth of 23.1% (all numbers are year-over-year).

APA also boasts a pretty healthy history of dividend growth. Since 2000, the company has raised its dividend in all but two years – making APA a nice dividend growth stock to date. On current prices, APA has a trailing yield of 3.65%, although you can’t rely on APA dividends to typically include franking credits.

Is APA a buy today?

APA is clearly a quality company with a fantastic position in the Australian energy market, which should ensure dominance for the foreseeable future. Saying this, the shares are looking a little pricey from my personal perspective. This isn’t uncommon in our current market, with investors presently placing a premium on stable infrastructure plays with solid dividends like APA. Although I wouldn’t quite call APA overvalued, I still would be looking for a bigger discount to what the market is offering today were to open a position in APA.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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