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Bull of the Day: Sunoco (SUN)

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Jeremy Mullin
·4 min read
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Sunoco (SUN) is a Zacks Rank #1 (Strong Buy) that distributes motor fuel to roughly 10,000 customers in more than 30 states. These customers include independent dealers, commercial customers, convenience stores and other distributors.

Sunoco buys motor fuel form refiners and then sells it to customers, so the price of that product and the spread they collect is huge for its bottom line.

The plunge in energy prices last year was not good for business. However, the recent rise of commodities prices, including oil and gasoline, have energy companies turning the corner.

About the Company

Sunoco was founded in 2012 and is headquartered in Dallas, TX. The company operates in two segments: Fuel Distribution & Marketing and All Other. The fuel and marketing portion is about 95% of the business, while the other 5% comes from retail stores, foodservice and merchandise.

Sunoco has a market cap of $3 billion and a PE of 8. The stock has Zacks Style Scores of “A” in Momentum, Growth and Value. The value proposition should attract investors, especially with the high yield the company pays out.

Energy Prices and Distributions

Sunoco is a master limited partnership or MLP, which means they distribute available cash to investors. The latest distribution yield for the company was 11%.

Earlier in the year there was concern that Sunoco and many other energy companies wouldn’t be able to pay out the dividends. However, with crude oil back over $50 and gasoline over $1.50, energy is back in favor with investors.

Q3 Earnings and Estimates

In early November, the company reported a 14% surprised EPS beat. Sunoco also beat on revenues and raised both FY20 capex and EBITDA. Total motor fuel gains sold were down year over year, but the market responded positively, lifting the stock from $25 to $29 in the two weeks following EPS.

It was the second straight beat for Sunoco and they will go for three in a row when they officially report Q4 earnings in February.

Analysts are hiking estimates over the last 7 days. For the next quarter, the numbers have gone from $0.66 to $0.81, or 23% higher. Estimates look to be trending higher for 2021, going from $3.67 to $3.78 over the same time frame, a bump of 3%.

Recent Upgrades

The bulls are seeing a lot of price targets being lifted due to the positive outlook in earnings and the change in tone of the energy markets. UBS recently reiterated their Buy rating and hiked their price target from $32 to $35. RBC matched that $35 target and reiterated their Outperform rating.

The Technical Take

From 2016-2020, the stock was stuck at the $30 level as investors seemed content with collecting distributions, but not paying up for them. In March, the stock plummeted under $11/share, but since rallied back to the $30 mark.

The stock is above all moving averages, with the 200-day at $25.50 and the 50-day at $28.50. All time highs for the stock are $59.99 and while investors shouldn’t expect the stock to get that high, they could see some appreciation in the coming months as investors look for value and yield.

 In Summary

The atmosphere in the energy markets is very different than where it was back in April of 2020. The space has been overlooked and investors are just now starting to recognize value in some oil and gas names.

Sunoco offers exposure in the space, with a high distribution yield to pay out while economies open up and pent-up demand floods in.

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