Morgan Stanley advised investors, in a note released on Wednesday, to take a selective approach towards U.S. midstream infrastructure stocks, identifying attractive entry points in companies with differentiated long-term growth, while downgrading TC Energy and Hess Midstream due to valuation and visibility concerns. $HMSTR
Analyst Robert Kad stated that the firm sees a "median total return of +18.9% over one year" in its midstream infrastructure coverage, including a dividend yield of 4.7%, with the stocks rated as above average implying a total return of 29.9%.
Targa Resources and Williams Companies were highlighted as the firm's favorites, offering "EBITDA growth above the sector and sustainable" with the highest potential for alpha generation.
Regarding the rating changes, Morgan Stanley downgraded TC Energy from outperform to market perform after the recent strong performance of the stocks, which are nearing the bank's estimated intrinsic fair price of $103.
Hess Midstream was downgraded to underperform from market perform, with the firm citing "limited visibility on long-term growth and the sponsor's strategy" as factors likely to restrict upside potential. $MAGMA
Western Midstream was upgraded from underperform to market perform, with recent repositioning through mergers and acquisitions strategically strengthening the company and providing greater visibility for 4% to 5% EBITDA growth over several years.
Morgan Stanley pointed out the situation in the Strait of Hormuz as a key short-term directional factor for the sector, noting that many investors have been reluctant to allocate capital amidst unresolved geopolitical tensions.
However, the firm argued that structurally higher oil prices mid-cycle and an eventual de-escalation should favor broader re-engagement, with flows from generalist investors and a "more significant re-rating" expected to focus on large C-corp companies with the strongest long-term growth profiles. $STG
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