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Sunoco Shares Gain 29% in a Year: How Should You Play the Stock?
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Sunoco LP (SUN - Free Report) units have gained 29.3% over the past year, which, though encouraging, lags the 58.1% growth of the broader industry. Sunoco's business model is stable and resilient, underpinned by its operation of one of the largest fuel distribution networks in the United States. This strength is evident in its price performance.
However, the company’s significant reliance on debt capital may have hindered its stock price movement, resulting in its underperformance relative to its industry peers.
One-Year Stock Price Performance
Image Source: Zacks Investment Research
The critical question now facing investors is how to position themselves regarding the stock. Before addressing this, let's review some fundamental aspects of the leading motor fuel distributor.
SUN’s Resilient & Stable Business Model
Sunoco ranks among the leading independent fuel distributors in the United States, with an annual distribution of more than 8 billion gallons of fuel. The master limited partnership leverages its extensive midstream assets, including a pipeline network that spans more than 14,000 miles, to distribute fuel across more than 40 states. Sunoco's diverse customer base includes convenience stores, commercial customers and independent dealers, making it a key player in the nation's fuel distribution landscape.
In addition to its transportation networks, Sunoco operates 100 terminals located across the United States, Hawaii, Mexico and Puerto Rico, offering substantial product storage capacity. These diverse midstream assets contribute to the company's ability to generate stable cash flows, as they are secured with long-term contracts, minimizing exposure to commodity price fluctuations and reducing volume risks.
SUN’s Prospects Brighten With Permian JV & NuStar Deal
On July 16, Sunoco entered into a joint venture (JV) with Energy Transfer LP (ET - Free Report) to consolidate their crude oil and produced water-gathering assets in the Permian, the most prolific basin in the United States. The JV, effective as of Jul 1, 2024, will immediately enhance the distributable cash flow per unit. This development is coupled with SUN’s stable business model and predictable fee-based cash flows, which suggests a promising outlook for the master limited partnership. Read our blog: Energy Transfer (ET - Free Report) Forms JV With Sunoco in Permian Basin.
On May 3, Sunoco completed the $7.3 billion acquisition of NuStar Energy LP. With the acquisition of the leading independent liquids terminal and pipeline operator, SUN has diversified its operations and enhanced its credit profile. For more details, read our blog: Sunoco and NuStar Join Forces for a 7.3B All-Equity Merger.
Time to Keep an Eye on SUN Stock?
SUN’s stable and lucrative business model enables it to reward unitholders with lucrative distribution yields. The partnership offers a solid distribution yield of 6.44%, higher than 4.76% of the composite stocks belonging to the industry. Another prominent operator of midstream assets, Western Midstream Partners LP (WES - Free Report) , offers an even higher distribution yield of 9.13%.
Image Source: Zacks Investment Research
Amid all these positive developments, SUN’s fundamentals that concern investors include its high debt exposure and low-margin business. Sunoco has significant leverage, with a debt-to-capitalization of more than 67%, and while leverage has improved, it remains a point of concern. Although the company aims to reduce leverage post the NuStar acquisition, it still poses a financial risk. Also, the fuel distribution business is known for its thin profit margins, a common trait in the industry. As a result, even minor fluctuations in market conditions, such as changes in fuel prices, can significantly affect the profitability of the stocks belonging to the industry.
Despite these negatives, the partnership’s long-term outlook looks promising, backed by strong growth prospects and stable fee-based cash flows. However, investors are advised to be cautious. Instead of rushing to add SUN, carrying a Zacks Rank #3 (Hold), to their portfolios, it may be prudent to wait for a more opportune entry point. You can see the complete list of today’s Zacks #1 Rank stocks here.
This is because, at this moment, units are somewhat expensive on a relative basis, with the current 17.95X trailing 12-month Enterprise Value/Earnings before Interest Tax Depreciation and Amortization staying above the 9.44X five-year median. Also, the partnership is trading at a premium compared to the broader industry average of 10.11X.
Image Source: Zacks Investment Research
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Sunoco Shares Gain 29% in a Year: How Should You Play the Stock?
Sunoco LP (SUN - Free Report) units have gained 29.3% over the past year, which, though encouraging, lags the 58.1% growth of the broader industry. Sunoco's business model is stable and resilient, underpinned by its operation of one of the largest fuel distribution networks in the United States. This strength is evident in its price performance.
However, the company’s significant reliance on debt capital may have hindered its stock price movement, resulting in its underperformance relative to its industry peers.
One-Year Stock Price Performance
The critical question now facing investors is how to position themselves regarding the stock. Before addressing this, let's review some fundamental aspects of the leading motor fuel distributor.
SUN’s Resilient & Stable Business Model
Sunoco ranks among the leading independent fuel distributors in the United States, with an annual distribution of more than 8 billion gallons of fuel. The master limited partnership leverages its extensive midstream assets, including a pipeline network that spans more than 14,000 miles, to distribute fuel across more than 40 states. Sunoco's diverse customer base includes convenience stores, commercial customers and independent dealers, making it a key player in the nation's fuel distribution landscape.
In addition to its transportation networks, Sunoco operates 100 terminals located across the United States, Hawaii, Mexico and Puerto Rico, offering substantial product storage capacity. These diverse midstream assets contribute to the company's ability to generate stable cash flows, as they are secured with long-term contracts, minimizing exposure to commodity price fluctuations and reducing volume risks.
SUN’s Prospects Brighten With Permian JV & NuStar Deal
On July 16, Sunoco entered into a joint venture (JV) with Energy Transfer LP (ET - Free Report) to consolidate their crude oil and produced water-gathering assets in the Permian, the most prolific basin in the United States. The JV, effective as of Jul 1, 2024, will immediately enhance the distributable cash flow per unit. This development is coupled with SUN’s stable business model and predictable fee-based cash flows, which suggests a promising outlook for the master limited partnership. Read our blog: Energy Transfer (ET - Free Report) Forms JV With Sunoco in Permian Basin.
On May 3, Sunoco completed the $7.3 billion acquisition of NuStar Energy LP. With the acquisition of the leading independent liquids terminal and pipeline operator, SUN has diversified its operations and enhanced its credit profile. For more details, read our blog: Sunoco and NuStar Join Forces for a 7.3B All-Equity Merger.
Time to Keep an Eye on SUN Stock?
SUN’s stable and lucrative business model enables it to reward unitholders with lucrative distribution yields. The partnership offers a solid distribution yield of 6.44%, higher than 4.76% of the composite stocks belonging to the industry. Another prominent operator of midstream assets, Western Midstream Partners LP (WES - Free Report) , offers an even higher distribution yield of 9.13%.
Image Source: Zacks Investment Research
Amid all these positive developments, SUN’s fundamentals that concern investors include its high debt exposure and low-margin business. Sunoco has significant leverage, with a debt-to-capitalization of more than 67%, and while leverage has improved, it remains a point of concern. Although the company aims to reduce leverage post the NuStar acquisition, it still poses a financial risk. Also, the fuel distribution business is known for its thin profit margins, a common trait in the industry. As a result, even minor fluctuations in market conditions, such as changes in fuel prices, can significantly affect the profitability of the stocks belonging to the industry.
Despite these negatives, the partnership’s long-term outlook looks promising, backed by strong growth prospects and stable fee-based cash flows. However, investors are advised to be cautious. Instead of rushing to add SUN, carrying a Zacks Rank #3 (Hold), to their portfolios, it may be prudent to wait for a more opportune entry point. You can see the complete list of today’s Zacks #1 Rank stocks here.
This is because, at this moment, units are somewhat expensive on a relative basis, with the current 17.95X trailing 12-month Enterprise Value/Earnings before Interest Tax Depreciation and Amortization staying above the 9.44X five-year median. Also, the partnership is trading at a premium compared to the broader industry average of 10.11X.