Sunoco (SUN) is currently hovering around the $30 mark, with the stock up about 15 percent on the year. The gas station chain’s business brass recently re-positioned the company so it can take better advantage of fuel storage and distribution.
Some investment analysts insist now is the best time to add this tried and true stalwart of the business world to your portfolio. Let’s take a closer look at Sunoco to determine if it is worth your hard-earned savings.
The Bull Argument: Sunoco is Positioned for Long-term Success
Take a look at Sunoco’s latest earnings, and you will be impressed. It appears as though company leaders have finally developed a business plan that will prove successful across posterity.
The quarterly numbers make it quite apparent that Sunoco is a seasonal business in which the money will always flow like water in the third quarter. This high-yield stock recently re-bought a considerable number of units as a component of its agreement to sell stores to 7-Eleven. Now that fewer stores are outstanding, the company needs that much less business to fund payouts for investors.
Though cash flow will likely always decline in Sunoco’s fourth quarters, there is no reason to be discouraged. Part of the deal with 7-Eleven aims to get Sunoco’s sizable debt under control. Once Sunoco gets a handle on its debt, there is a good chance the company will hike its dividend once again, rewarding loyal investors all the more.
The Debt Problem for Sunoco
Sunoco has some debt on the balance sheet. Its financial debt to equity ratio is 1.3 times what it was at the end of last year. This level is more than double that of some primary competitors in Sunoco’s space. The company’s financial debt to EBITDA ratio was 5.2 times that of CrossAmerica’s at the end of last year, 7.2 times that of Enterprise and nearly four times that of CrossAmerica.
The bottom line is you should be somewhat hesitant to invest in a company with this much debt and lack of significant growth. Though Sunoco has some expansion plans and designs on acquiring other businesses, such actions are almost certain to require the addition of more debt. Most Sunoco purchases are half equity and half debt funding. If you insist on investing in businesses in the black or nearing the black, you should think twice before parking your money in a company like Sunoco.
The Developing Identity Crisis
Sunoco’s leaders have steered the company in a couple different directions in the past half-decade. The business started out as a means for Energy Transfer to consolidate its retail/fuel distribution assets. The company then consolidated various retail filling stations by way of acquisition and growth.
Unfortunately, neither strategy worked as planned. At the moment, company executives are attempting to make the business one of the country’s top fuel wholesale distributors. The question is whether this current strategy will prove successful, or if Sunoco execs will have to go back to the drawing board once again. It appears as though Sunoco might be on the right track.
Sunoco executives should not be chastised for originally insisting the company own and operate its own convenience stores. The plan was to support these stores with the company’s wholesale fuel distribution. It seemed like a sensible strategy on paper, yet the company’s push for rapid growth ended up backfiring. There is nothing wrong with letting 7-Eleven handle the retail aspect while Sunoco focuses on what it does best: distributing fuel across the country with remarkable efficiency.
Furthermore, it appears as though Sunoco’s leadership is finally willing to get its debt fully under control. As long as the company’s brass does not insist on making a number of risky acquisitions in the near future, Sunoco might prove to be a solid investment.
Buy, Sell or Hold?
Hold for now. Pay close attention to this stock in the weeks and months ahead. If Sunoco executives show they are capable of growing the brand without jeopardizing the bottom line, give some consideration to investing in this stock. Look for Sunoco to hover in the range of $28 to $32 for the next couple weeks. If the stock dips below the $30 mark and management does not raise any red flags in the meantime, you might make out like a bandit with the timely addition of Sunoco to your portfolio.