Jefferies Upgrades Sunoco Following Multi-Billion Deal With 7-Eleven

Christopher Sighinolfi of Jefferies upgraded shares of Sunoco LP SUN from Underperform to Hold with a price target boosted from $20 to $29 after the retail seller of motor fuels and merchandise struck a deal to sell over 1,000 gas stations and convenience stores to the parent company of 7-Eleven.

Sunoco agreed to sell 1,100 stores to 7-Eleven for $3.3 billion and also inked a deal to supply up to 2.7 billion gallons of fuel per year to these retail sites for at least 15 years. According to Sighinolfi, Sunoco's deal is part of a strategy to diversify itself from a convenience store operator and fuel distributor to a more simplified wholesaler of fuel.

The analyst noted that Sunoco's third-party fuel margins averaged around five cents per gallon from 2004 through 2013 but has averaged around 10 cents per gallon in 2015 and 2016. By comparison, the company is targeting a $0.06–$0.08 per gallon target and every $0.01 of margin represents approximately $55 million per year of gross profit.

More Is Needed

The analyst believes the company's wholesale volumes will rise to around 60 percent from 2017 through 2021 after the 7-Eleven agreement. While the divestiture addresses Sunoco's leverage pressure and does give management the ability to buy back some of its stock or hunt for an accretive acquisition, the actions taken so far is insufficient to warrant a bullish rating.

Sighinolfi emphasized that Sunoco's actions so far won't lead to the company achieve a target leverage of 4.5–4.75x and a 1.1x payout ratio. Nevertheless, the positive changes so far warrant a $29 price target, although as of Monday morning, the stock was trading above $30 per share. Related Links:

7-Eleven's $3.3 Billion Expansion In The U.S.

Vetr Hits Sunoco With Another Downgrade ____________ Image Credit: By Mike Kalasnik from Fort Mill, USA - IMG_4662, CC BY-SA 2.0, via Wikimedia Commons