Decisive Acquisitions And Innovative Merchandising Propel Company Into A New Era Of Profitability

Key Takeaways

• Strategic acquisitions and a long-term agreement from the Motiva transaction are set to significantly enhance revenue and stabilize cash flows.
  
• Focus on increasing profitability margins through the GDSO segment and returning value to shareholders via increased cash distributions.
  
• Strategic acquisitions and significant investments in terminals heighten integration and financial risks, while fluctuating fuel margins and competitive pressures may impact earnings and cash flows.

Catalysts

Engages in the purchasing, selling, gathering, blending, storing, and logistics of transporting gasoline and gasoline blendstocks, distillates, residual oil, renewable fuels, crude oil, and propane to wholesalers, retailers, and commercial customers.

• Expansion through strategic acquisitions, including the recent addition of 29 terminals from Motiva Enterprises and Gulf Oil, enhancing Global Partners' storage capacity and geographic reach, likely to significantly boost revenue by increasing market share and operational scale.
  
• The Motiva transaction is supported by a 25-year take-or-pay throughput agreement, ensuring a minimum annual revenue stream, thereby potentially increasing stability and predictability of cash flows to support earnings growth.
  
• Increased investment in Wholesale and Gasoline Distribution and Station Operations (GDSO) segments have led to noteworthy gains in operating income, net income, DCF, and adjusted EBITDA, suggesting a direct impact on enhancing profitability margins.
  
• Enhanced retail fuel margins and successful merchandising initiatives within the GDSO segment suggest an ongoing strategy to increase product margin through higher fuel margins and optimized convenience store offerings, directly contributing to revenue and net margin enhancement.
  
• Commitment to distributing increased cash distributions to unitholders reflects strong distributable cash flow and financial health, potentially benefiting earnings per share by returning value to shareholders and indicating confidence in sustained financial performance.

Assumptions

• Analysts are assuming Global Partners's revenue will grow by 27.6% annually over the next 3 years.
• Analysts are assuming Global Partners's profit margins will remain the same at 0.5% over the next 3 years.
• Analysts expect earnings to reach $180.0 million (and earnings per share of $4.94) by about September 2027, up from $93.6 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.5x on those 2027 earnings, down from 15.9x today. This future PE is greater than the current PE for the US Oil and Gas industry at 9.9x.
• Analysts expect the number of shares outstanding to decline by 0.54% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.15%, as per the Simply Wall St company report.

Risks

• High reliance on strategic acquisitions for growth, especially in the Wholesale segment, could lead to integration risks and challenges in maximizing asset value, potentially impacting future earnings if the expected synergies are not realized.
  
• The significant investments in terminal acquisitions and the necessity for further investments to optimize these assets increase financial leverage, which may impact net margins due to higher interest expenses and debt servicing requirements.
  
• Exposure to fluctuating fuel margins and market conditions in both Wholesale and GDSO segments could lead to volatility in revenue and earnings, particularly if market conditions become less favorable.
  
• The ongoing need for substantial capital expenditures for maintenance and expansion, primarily in gasoline stations and terminal businesses, could strain cash flows and impact earnings if the projects do not deliver the expected return on investment.
  
• Competitive pressures and the continuous need for effective merchandising initiatives in the convenience store market suggest that sustaining high product margins may require ongoing, potentially increasing, investments in marketing and store optimization, affecting net margins.

Valuation

• The analysts have a consensus price target of $51.0 for Global Partners based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $35.7 billion, earnings will come to $180.0 million, and it would be trading on a PE ratio of 12.5x, assuming you use a discount rate of 10.1%.
  
• Given the current share price of $43.99, the analyst's price target of $51.0 is 13.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.