Sunoco L.P. (SUN) is a retail motor fuel distributor across the U.S. The company operates as a Master Limited Partnership (MLP), a structure that is a hybrid of a limited partnership and public corporation. MLP companies  resemble a limited partnership company, but their shares are traded on stock exchanges. Thus, SUN operates as a public limited company, but it is taxed as a partnership. This is immensely beneficial because MLPs are not required to pay corporate taxes on their operating profits.

Shares of SUN have gained 46.6% over the past year and 27.3% year-to-date. In addition, the stock gained 6.3% over the past five days.

As the economy regains  pre-pandemic levels on a fast-paced vaccination program and federal rescue spending, demand for motor fuel is expected to rise substantially.

So, here’s what we think what could shape SUN’s performance in the coming months:

Rebounding Oil Demand

Demand for oil is expected to rise 6.6% year-over-year to 5.95 million barrels/day in 2021, according to latest OPEC estimates. Furthermore,  the United States oil inventory declined by eight  million barrels last week as exports increased to a 4.10 million b/d post pandemic high. This surpasses the Energy Information Association’s prediction of a 2.30-million-barrel decline last week.

The demand for oil has been recovering  rapidly as the global economy recovers from the repercussions of the pandemic. However, oil prices have been fluctuating lately, owing to a  COVID-19 situation in India, and lower imports by Japan. However, the reduced demand and the expected change in supply environment are expected to be short lived.

Discounted Valuation

In terms of non-GAAP forward P/E, SUN is currently trading at 9x, 20.5% lower than the 11.33x industry average. The company’s forward price/sales and EV/sales ratios of 0.22 and 0.47, respectively, compare favorably with industry averages.

Also, SUN’s 12.36 forward EV/EBIT multiple is 17.5% lower than the 14.98 industry average.

Favorable Growth Estimates

A$0.61 consensus EPS estimate for the fiscal first quarter, ended March 2021, indicates a 134.3% improvement year-over-year. Also, analysts expect the company’s EPS to rise 119.9% from the same period last year to $3.54 in its fiscal year 2021. SUN’s revenue is expected to increase 6.9% from the year-ago value to $3.50 billion in the most recent quarter. The Street expects the company’s annual revenues to rise 37.2% year-over-year to $14.69 billion in the current year.

POWR Ratings Reflect Rosy Prospects

SUN has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

SUN has a B grade  for Growth and Value. The company’s net income increased at a 12.5% CAGR over the past three years and its EBIT rose at a 6.9% CAGR over this period, justifying the Growth grade. The stock’s discounted valuation compared to its peers account for the Value grade.

Of  40 stocks in the B-rated MLPs – Oil & Gas industry, SUN is ranked #6. Beyond what I’ve stated above, one  can view additional SUN Ratings for Sentiment, Stability, Momentum and Quality here.

Click here to view the top-rated stocks in the MLPs – Oil & Gas industry.

Bottom Line

As demand for oil increases worldwide, crude oil prices will  rise. Moreover, OPEC’s plans to increase production by 2 billion barrels a day over the next three months despite a recent slump in demand from India and Japan demonstrate the organization’s optimistic outlook regarding future demand. However, given President Biden’s plan to raise corporate tax rates soon, SUN should be a value investment due to its low tax burden. 

SUN shares were trading at $35.91 per share on Thursday afternoon, down $0.73 (-1.99%). Year-to-date, SUN has gained 27.98%, versus a 11.73% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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