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Bear of the Day: Suburban Propane (SPH)

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I can only speak for myself, but I believe that most people like warm weather better than cold weather.  But the weather does play a key role in some areas of commerce.  The winter that is almost behind us (it still gets cold in Chicago at night), but it was a mild winter compared to recent years.  According to NOAA (National Oceanic and Atmospheric Administration), the 2015-2016 winter was 13% warmer in the contiguous United States.  This warmer weather negatively impacted Suburban Propane Partners (SPH - Free Report) , and they are our Zacks Bear of the Day.  

This Zacks Ranked #5 (Strong Sell) company is a publicly traded Delaware limited partnership is engaged, through subsidiaries, in the retail and wholesale marketing of propane and related appliances and services. The Partnership believes it is the third largest retail marketer of propane in the United States, Suburban Propane Partners serves active residential, commercial, industrial and agricultural customers from customer service centers in over 40 states. The Partnership's operations are concentrated in the east and west coast regions of the United States.

In their most recent earnings report, the company saw year over year declines in adjusted EBITDA -32.3%, retail propane gallons sold -19.1%, sales of fuel oil -33.2%, revenues -32.6%, and average posted propane prices and fuel oil prices fell -27%, and -40.2% respectively.  

According to Michael Stivala, President and CEO, “Our results for the second quarter of fiscal 2016 reflect the challenging operating environment stemming from record warm temperatures during this year's heating season that adversely impacted customer demand during the quarter.  The flexible nature of our cost structure and the strength of our balance sheet helped mitigate some of the short-term, weather-driven earnings shortfall.  Despite the lower earnings, we continued to fund all of our working capital requirements without the need to borrow under our revolving credit facility and we ended the quarter with approximately $59.0 million of cash on hand.”

As you can see from the graph below, expectations for 2016 and 2017 are trending downwards.

Decreasing Estimates

Estimates for Q3 16, Q4 16, FY 16, and FY 17 have all seen consensus earnings downgrades over the past 7 days; Q3 16 fell from -$0.56 to -$0.59, Q4 16 dropped from -$0.78 to -$0.81, FY 16 slipped from $0.93 to $0.59, and FY 17 fell from $1.96 to $1.80.

Bottom Line

The cold weather dampened revenues and declines in oil and propane prices significantly hurt both SPH’s top and bottom lines.  If we have another warmer than normal winter in 2016-2017, the company will need to reevaluate many parts of their business especially their distribution channel.  

If you are inclined to invest in the Oil Refining & Marketing MLP segment, you would be best served by looking into CVR Refining (CVRR), and or Midcoast Energy Partners (MEP), both of which carry a Zacks Rank #1 (Strong Buy).

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