Commentary

Sunoco Valuation (SUN)

Sunoco (SUN)

Company Profile (obtained via Yahoo finance)

Sunoco, Inc., through its subsidiaries, manufactures and markets various petroleum products, including fuels, lubricants, and petrochemicals in the United States. It also manufactures chemicals and has interests in logistics and cokemaking. The company operates in five segments: Refining and Supply, Retail Marketing, Chemicals, Logistics, and Coke. The Refining and Supply segment manufactures petroleum products, including gasoline; and middle distillates, such as jet fuel, heating oil, and diesel fuel; and residual fuel oil. It also produces commodity petrochemicals, including olefins and their derivatives, such as ethylene, ethylene oxide polymers, and refinery-grade propylene; and aromatics and their derivatives, which include benzene, cyclohexane, toluene, and xylene. This segment also manufactures petroleum and lubricant products. It sells these products primarily to wholesale and industrial customers. The Retail Marketing segment engages in the retail sale of gasoline and middle distillates, as well as the operation of convenience stores in 25 states, primarily on the East Coast and in the midwest region of the United States. The Chemicals segment manufactures, distributes, and markets commodity and intermediate petrochemicals, such as cumene, phenol, acetone, bisphenol-A, and other phenol derivatives. The Logistics segment operates refined product crude oil pipelines and terminals, and conducts crude oil acquisition and marketing activities primarily in the northeast, midwest, and south central regions. As of December 31, 2006, the company owned and operated 3,800 miles of crude oil pipelines and 1,650 miles of refined product pipelines. The Coke segment operates metallurgical coke plants and metallurgical coal mines, and manufactures metallurgical coke for use in the steel industry. Sunoco was founded in 1886 and is based in Philadelphia, Pennsylvania.

 Business and Management Review
1) Is the business simple and understandable?
The concept of convenience stores and gas stations are pretty straightforward.  Where it gets complicated is Sunoco’s dabbling in Coke refining and chemical manufacturing.  2) Does the business have a consistent operating history?
They do not have consistent operating history in this analyst’s mind as they have reported net losses in the past decade.3) Does the business have favorable long term prospects?
Domestically I can’t ever see any reason to doubt the ever loved American tradition of a convenience store.  However; the core of their business seems to be in petroleum based operations and unless they are willing to refine that then they may see dark days ahead. 4) Is management rational?
I have no reason to doubt their rationale.5) Is management candid with its shareholders?
Yes they have an investor relations site. 6) Does management resist the institutional imperative?
It may be a little cynical but I’m finding it hard to say that any company that lets the core of their business remain fossil fuels in this day and age does not resist the institutional imperative.Financial and Value ReviewDefensive:
1) Size of firm

The firm is above $2 billion in market capitalization. Pass2) Strong financial condition
The firm falls below the required ratio of 2. Fail3) Earnings stability
Sunoco has not had positive net income for the past 10 years. Fail4) Dividend record
Dividends have been paid for the past ten years. Pass5) Earnings growth
EPS have grown by 1/3 consistently over the past ten years. Pass6) Price to earnings analysis
With a P/E ratio of 13.05 Sunoco falls well below the threshold of 20. Pass7) Price to assets analysis
P/B is more than 2.5 requirement. FailOverall
With a score of 4/8 Sunoco fails the test for the defensive investor and should not be included in their portfolio. Enterprising:
1) Strong financial condition

Though the current ratio is still less than 1.5, the debt to net current assets is less than 1.1.  Pass 2) Earnings stability
Positive net income has not been reported for the past five years. Fail3) Dividend record
Sunoco currently pays a divident. Pass. 4) Earnings growth
Earnings are greater than five years ago. Pass. 5) Price
The current share price is not less than 150% of the net tangible assets. FailOverall
Scoring 3/6 Sunoco fails the test for the enterprising investor. Valuation:
We find a fair market price for this firm to be around $91 per share. Opinion:
Given the fact that our valuation puts the intrinsic value of this stock more than $20 above what it’s trading at today; we cannot recommend a strong buy because it does not meet the standards that we require in our investing.  Personally I think if the company can in fact prove their worth in the next few years—and that they can be a competitor in the long-term—than it is definitely a stock worth revisiting then. None of the staff of ModernGraham.com held a position in Altria at the time of publication.  Also, please read our disclaimer and our methods.  

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