ModernGraham Valuation: Suburban Propane Partners LP (SPH)

moneyCompany Profile (obtained from Google Finance): Suburban Propane Partners, L.P. (the Partnership) is a nationwide marketer and distributor of a range of products meeting the energy needs of the customers. The Partnership specializes in the distribution of propane, fuel oil and refined fuels, as well as the marketing of natural gas and electricity in deregulated markets. The Company installs and services a range of home comfort equipment, particularly in the areas of heating and ventilation. As of September 24, 2011, it was serving approximately 750,000 residential, commercial, industrial and agricultural customers through approximately 300 locations in 30 states located primarily in the east and west coast regions of the United States, including Alaska. During the fiscal year ended September 24, 2011 (fiscal 2011), it sold approximately 298.9 million gallons of propane and 37.2 million gallons of fuel oil and refined fuels to retail customers. On August 1, 2012, it acquired Inergy L.P.’s retail propane operations.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 2/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary (Explanation of the ModernGraham Valuation Model)

Key Data:

MG Value $0.00 ** Rare situation.  See conclusion.
MG Opinion Overvalued
Value Based on 3% Growth $27.07
Value Based on 0% Growth $15.87
Market Implied Growth Rate 8.28%
NCAV $0.99
PEmg 25.05
Current Ratio 1.25
PB Ratio 2.49

Balance Sheet – 9/30/2013 

Current Assets $293,300,000
Current Liabilities $233,900,000
Total Debt $1,245,200,000
Total Assets $2,728,000,000
Intangibles $1,504,200,000
Total Liabilities $1,598,900,000
Outstanding Shares 60,230,000

Earnings Per Share

2013 $1.34
2012 $0.05
2011 $3.22
2010 $3.24
2009 $4.96
2008 $3.37
2007 $3.77
2006 $2.81
2005 $2.00
2004 $0.93
2003 $1.76
2002 $2.11

Earnings Per Share – ModernGraham 

2013 $1.87
2012 $2.41
2011 $3.63
2010 $3.77
2009 $3.81
2008 $3.02

Conclusion:

Suburban Propane Partners is a company that once had a very promising potential for profitable investing.  However, the last few years have seen a significant fall in earnings, and the company now is not suitable for either the Defensive Investor or the Enterprising Investor.  For both investor types, the company’s failure to grow its earnings (as mentioned, earnings have dropped), and its high debt relative to current assets are major turn-offs.  Investors may be better satisfied if they review some of the Undervalued Companies in the ModernGraham database.  As for a valuation, the company’s EPSmg (normalized earnings) have dropped from $3.02 in 2008 to $1.87 in 2013.  Meanwhile the market is implying the company will grow its earnings at a rate of 8.28%.  Clearly, this implied growth rate is not supported by the historical performance and as a result the company would appear to be overvalued at the current time.  The ModernGraham valuation model even brings back a value of zero, which simply indicates that any value in the company does not come from the earnings.  Rather, value in the company must turn on the balance sheet, in which case we normally would look at the NCAV, but that is negative here as well.  As a result, it is our opinion that determination of the value includes too much speculation for investors seeking to follow ModernGraham’s interpretation of Benjamin Graham’s teachings.

What do you think?  Do you agree that Suburban Propane Partners LP is overvalued?  What would be your assessment?  Is the company not suitable for Defensive Investors or Enterprising Investors?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

If you like our valuations, why not check out ModernGraham Stocks & Screens?  It’s a great way to review the valuations while screening for things like low PE ratio, undervalued companies, etc.!

Disclaimer:  The author did not hold a position in Suburban Propane Partners LP (SPH) at the time of publication and had no intention of entering into a position within the next 72 hours.

Photo Credit:  Andrew Magill


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