Acquisitions Will Extend Fuel Distribution Into North America And Europe

Key Takeaways

• Strategic acquisitions in North America, the Caribbean, and Europe are set to expand Sunoco's reach and diversify its asset base, enhancing earnings growth.
  
• Strong financial flexibility and disciplined fuel profit optimization can boost Sunoco's earnings and shareholder value amid inflationary pressures.
  
• European acquisitions and reliance on external contracts pose financial risks amid declining fuel distribution volumes and operational challenges, threatening revenue and earnings stability.

Catalysts

Engages in the energy infrastructure and distribution of motor fuels in the United States.

• The acquisition of Parkland Corporation is expected to expand Sunoco's geographic reach in North America and the Caribbean, enhancing growth opportunities in their Fuel Distribution business. This could lead to increased revenue and earnings.
  
• The acquisition of TanQuid, Germany's largest independent storage operator, provides stable cash flows and potential synergies with existing European assets. This aligns with Sunoco’s strategy of diversifying its asset base, which may improve net margins and earnings.
  
• Sunoco's strong balance sheet and extended debt maturity profile following a recent $1 billion senior notes offering provide financial flexibility to pursue future growth opportunities, impacting overall revenue and net margins positively.
  
• The focus on fuel profit optimization through market volatility and maintaining expense discipline in an inflationary environment supports strengthened earnings, especially if Sunoco can continue to capture margin opportunities effectively.
  
• Continued increases in distributions, a commitment highlighted by a consistent strategy of at least 5% annual distribution growth, can drive shareholder value and provide confidence in future cash flow and earnings growth.

Sunoco Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Sunoco's revenue will grow by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 4.3% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $6.57) by about July 2028, up from $689.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $914 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.4x on those 2028 earnings, down from 10.4x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.3x.
• Analysts expect the number of shares outstanding to grow by 0.25% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.96%, as per the Simply Wall St company report.

Sunoco Future Earnings Per Share Growth

Risks

• The European acquisition strategy, including the TanQuid acquisition, involves assuming approximately EUR 300 million of debt, which could impact net margins and financial flexibility if the expected cash flows don't materialize.
  
• Volumes in the Fuel Distribution segment saw a decline of 3% from the previous quarter, which could indicate challenges in maintaining or growing revenue from this segment.
  
• The reliance on external factors like the 7-Eleven take-or-pay contract to anchor the Fuel Distribution business could pose risks if any contractual terms change or aren't renewed, affecting earnings stability.
  
• Operational challenges and reliability issues at refineries impacting the Pipeline Systems segment might lead to lower throughput and reduced earnings if such issues persist.
  
• Persistent inflation and the potential for a recession are acknowledged as risks, which could negatively affect both revenue and profit margins if consumer fuel demand decreases.

Valuation

• The analysts have a consensus price target of $64.833 for Sunoco 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 2028, revenues will be $27.6 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 9.4x, assuming you use a discount rate of 8.0%.
• Given the current share price of $52.72, the analyst price target of $64.83 is 18.7% 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.