Star Group, L.P. (SGU) is a full-service provider that sells home heating products and services. Its stock has gained 47.8% over the past year. This is mainly attributable to a strong rebound in the global oil market due to a significant revival in industrial production and oil production cuts implemented by OPEC and its allies on the supply side. The stock has gained 4.3% over the past month and 16.7% year-to-date.
The company’s recent strategic acquisition of propane dealers, coupled with its continued focus on streamlining the cost structure, is further driving its financials. Moreover, with better-than-expected recent quarter performance, we think the stock is worth buying now.
Here are the factors that we think could help SGU keep moving higher:
The global oil market is rallying with rising industrial activity and unprecedented oil production cuts by the OPEC and its allies. At the 14th OPEC and non-OPEC Ministerial Meeting in early March, OPEC and non-OPEC ministers agreed to maintain March’s moderate production levels in April too. Saudi Arabia added that it would extend its 1mb/d voluntary production cut into April. However, OPEC+ recently decided to gradually curb production cuts beginning in May.
On the consumption side, the federal government’s recent $1.9 trillion coronavirus relief package has been driving consumer spending, which is expected to boost aggregate demand for energy by the industrial sector. This demand-supply imbalance for crude oil should keep driving Star Group’s financials, at least in the near term.
Robust Quarterly Performance
During the fiscal first quarter (ended December 31, 2020), SGU maintained its focus on cost discipline and customer service while acquiring two propane dealers in late December that are expected to add roughly seven million gallons of production annually. The company’s operating income has increased 29.1% year-over-year to $54.79 million in the quarter. Its adjusted ebitda has risen slightly from its year-ago value to $45.35 million, due to higher per-gallon home heating oil and propane margins, while its EPS has improved 51% to $0.74,due primarily to a favorable change in the fair value of derivative instruments, and lower depreciation and amortization expenses.
Decent Historical Growth, But Trading at a Discount
SGU has gained 10.3% over the past three years due to its impressive earnings and total assets growth.
The company’s ebit has grown at a CAGR of 27.6% over the past three years, while its total assets have increased at a CAGR of 4.4% over the same period.
The company’s trailing-12-months p/e of 8.47x is 61.5% lower than the industry average 22.03x. In terms of its trailing-12-month price/sales, the stock is currently trading at 0.36x, 86.1% lower than the industry average 2.59x.
High Dividend Yield
SGU pays a $0.13 quarterly dividend, cumulating with an annual dividend of $0.53, representing a 4.89% yield. The company’s four-year average dividend yield is 5.08%.
POWR Ratings Reflect Solid Prospect
SGU has an overall A rating, which equates to Strong Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight different categories. Among these categories, SGU has a B grade for Growth, which is in sync with the company’s impressive revenue and earnings growth over many years.
It also has a grade of A for Value, which is in sync with the company’s lower-than-the-industry valuation ratios discussed above.
SGU is currently ranked #1 of 41 stocks in the B-rated MLPs – Oil & Gas industry. In addition to the grades we’ve highlighted, one can check out SGU’s POWR Ratings for Sentiment, Stability, Momentum, and Quality here.
If you’re looking for other top-rated stocks in the MLPs – Oil & Gas industry, with an Overall POWR Rating of A or B, you can access them here.
Despite warmer weather dampening demand for home heating oil and propane, SGU’s growth potential appears strong given its impressive financials, expanding international footprint and industry tailwinds. Thus, we think it may be the right time to invest in this undervalued stock.
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SGU shares were trading at $11.03 per share on Tuesday morning, down $0.08 (-0.72%). Year-to-date, SGU has gained 18.81%, versus a 9.12% rise in the benchmark S&P 500 index during the same period.
About the Author: Rishab Dugar
Rishab is a financial journalist and investment analyst. His investment approach is to focus on quality stocks, trading at low prices, with business models that he readily understands. More...
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