Sunoco To Benefit From 'Timing Trifecta,' Says JPMorgan

Sunoco LP SUN is expected to benefit from a "timing trifecta" and now is the time to turn bullish on the stock, according to JPMorgan.

The Analyst

JPMorgan's Andrew Burd upgraded Sunoco's stock rating from Neutral to Overweight with a price target boosted from $31 to $34.

The Thesis

The case for owning Sunoco's stock is based on the ideal timing of three separate events, Burd said in the upgrade note: tax reform, the 7-Eleven divestiture and a strong bond market. (See the analyst's track record here.)

Sunoco's 2017 deal to sell more than 1,100 of its convenience stores to 7-Eleven will benefit from the recent tax reform to the tune of $290 million, the analyst said. The company can use that savings for additional unit repurchases that will boost its distribution coverage to more than 1x, according to JPMorgan.

Sunoco also signaled in a regulatory release this week a "better leverage cushion," which indicates a strong bond market, Burd said. As of the third quarter, the company's pro forma LTM adjusted EBITDA stood at $596 million versus $514 million in the second quarter, he said. This suggests Sunoco can make a higher number of buybacks, with JPMorgan raising its buyback estimate from $200 to $600 million.

Sunoco's stock is trading at an 11.5x multiple on the analyst's EV/LP EBITDA estimate for 2018 and 109.x in 2019 — which is "reasonable," Burd said. A $34/unit price target implies an 11.5x multiple on 2018's estimates. The 11.4-percent distribution per unit is secure, and the stock could see additional upside potential from accretive bolt-on M&A activity, according to JPMorgan.