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Sunoco (SUN) Hits 52-Week High: What's Behind the Uptrend?

Zacks Equity Research

Sunoco LP’s SUN units attained a 52-week high of $32.44 on Jul 5, before eventually closing at $32.40, generating a healthy year-to-date rate of more than 19%. Robust acquisitions, cost-cut measures and high yield have been fueling the firm’s performance. Notably, the partnership gained around 28.5% over a year against the broader industry’s decline of 6.2%. Let’s take a closer look at the factors driving the stock.

Repositioning of the Business Model Pays Off

The strategic shift from partnership-operated convenience stores to fuel supply business came to fruition. In January 2018, Sunoco closed the deal to divest most of its convivence stores to 7-Eleven to sharpen focus on the fuel supply business. Offloading bulk of retail assets was a big deal for Sunoco as those properties accounted for more than 33% of the partnership’s top line. Nonetheless, the massive transformation worked much in favor of Sunoco as it trimmed the partnership’s heavy debt burden and streamlined its portfolio. As part of the deal, Sunoco entered into a 15-year agreement with 7-Eleven to sell 2.2 billion gallons of fuel annually, thereby improving the partnership’s financial profile and becoming a pure play for the distribution of gasoline.The proceeds from the sale were used to tap opportunistic acquisitions.

Slew of Buyouts Bode Well

Sunoco’s array of fuel distribution and terminal acquisitions are expected to be highly accretive to distributable cash flows, while realizing substantial cost synergies. The four bolt-on purchases made in the course of 2018 should aid the partnership’s net income and EBITDA significantly.

In April 2018, Sunoco had acquired the wholesale fuel distribution business from Superior Plus Corporation. The business distributes roughly 200 million gallons of fuel every year. To bolster the core fuel distribution business, Sunoco completed the Sanford Oil buyout last August to distribute roughly 115 million gallons of fuel every year.The wholesale distribution businesses that Sunoco had acquired in Ohio, Pennsylvania, West Virginia and New York in December 2018 have the capacity to transport roughly 180 million gallons of fuel every year. Moreover, during 2018-end, it had acquired two refined products terminal businesses located in North Texas and Arkansas, with around 77,500 barrels per day of total throughput as well as 1.3 million barrels of storage capacity. All these acquisitions are expected to be highly accretive to the unitholder’s cash flows going forward.

As it is, the partnership is poised to gain from strong gasoline demand and rising consumption of diesel fuel. Notably, the partnership expects extensive fuel distribution operations to distribute fuel volumes of 8-8.2 billion gallons through 2019, higher than 7.9 billion gallons in 2018.

Cost Discipline Aids Profit Levels

The partnership is currently focused on reducing costs and expenses. This is expected to benefit its bottom line. It has managed to significantly reduce costs and expenses in the last few quarters. Total cost of sales and operating expenses declined 11.6% and 9.6% sequentially in fourth-quarter 2018 and first-quarter 2019, respectively. The trend is expected to continue, thereby helping the partnership in increasing profit levels in the coming quarters.

Notably, Sunoco beat estimates in three out of the trailing four quarters, with average positive surprise of 29.73%. Per the Zacks model, the partnership expects year-over-year growth of 100% in 2019 earnings.

Wrapping Up

Considering the above-mentioned factors, Sunoco — being one of the largest motor fuel distributors in the wholesale market in terms of volume — is likely to maintain share price momentum. While the partnership has not hiked distribution since mid-2016, Sunoco boasts a double-digit yield of 10.19%, higher than the industry’s 8.7%.

However, one red flag that investors have to watch out for is the partnership’s high leverage ratio of more than 79%. While divestment and cost-curtailment initiatives have shored up the balance sheet to some extent, the partnership still carries a considerable long-term debt of $2.3 billion.

Nevertheless, we believe that strategic buyouts to boost the core fuel distribution business, and increasing consumption of gasoline and diesel will help the Zacks Rank #2 (Buy) partnership to tide over the challenges and drive its performance further. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Other Refining and Marketing MLPs to Consider

Other top-ranked stocks in the same space include Calumet Specialty Products Partners, L.P. CLMT, NGL Energy Partners LP NGL and Western Gas Equity Partners, LP WES. While Calumet sports a Zacks Rank #1, NGL Energy and Western Gas carry a Zacks Rank #2.

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