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Bull of the Day: Sunoco LP (SUN)

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The price of oil tends to move in fairly well defined trends and the earnings of oil companies mostly follow suit. After a nearly three-year rally that began at the beginning of 2016 that saw the price of WTI crude go from below $27/bbl. to over $75/bbl. the last three months of 2018 were brutal.

Trade war fears and the possibility of a global economic slowdown hit the price of oil hard. The revelation that the US would grant exemptions from the sanctions on Iran and allow several trading partners – most notably India – to continue to purchase oil from Iran put further downward pressure on oil.

After falling more than 40% in the fourth quarter of 2018, the price of oil is again on the rise as most of the trade worries appear to be well on their way to being solved and the fears of a global recession have significantly abated.

Founded in 1886 in Pennsylvania, Sunoco LP (SUN - Free Report) has been operated since 2012 as a subsidiary of Texas-based Energy Transfer Partners (ET - Free Report) , one of the nation’s largest Natural Gas distributors.

ET transformed Sunoco’s business to focus on logistics and transportation fuels, as well as the gathering, treatment, processing and marketing of liquid natural gas.

Sunoco distributes fuel to approximately 10,000 convenience stores, independent dealers, commercial customers in 30 states, including the entire east coast from Florida to Maine. They also support the franchised operations of APlus stores, which sell groceries, snacks and beverages at considerably higher margins than fuel products.

Because of the volatility of the commodities markets that Sunoco is involved in, earnings results have been historically volatile, with the Price, Consensus and Surprise chart showing several big beats as well as several big misses.

Though the most recent quarterly earnings of $0.51/share were a bit of a disappointment, estimates for the rest of the year are on the rise, with the full year Zacks Consensus Earnings Estimate now at $2.48/share - an 81% increase over 2018. SUN is currently a Zacks Rank #1 (Strong Buy).

In the fourth quarter of 2018, Sunoco completed three acquisitions, two in the fuel distribution business and one in refined products terminalling, as well as the purchase of $50M worth of convenience store locations that were previously Speedway branded stores. The company also executed an agreement to sell its ethanol plant which was no longer a good fit for the refocused company.

Thanks to a healthy cash position and a strengthening balance sheet, Sunoco paid an exceptional cash dividend in the most recent quarter of $0.825/share – a yield of over 10% annually at current share prices. If cash flows remain strong as analysts expect, it wouldn’t be surprising to see share price appreciation simply in order to grow into that juicy dividend.

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