Goldman Now A Sunoco Bear On Projections Of Negative Consensus Revisions

Negative earnings revisions and below-average financial metrics are creating headwinds for Sunoco LP SUN, according to Goldman Sachs.

In January, JPMorgan upgraded the stock, citing the ideal timing of three separate events.

The Analyst

Goldman analyst Jerren Holder downgraded Sunoco from Neutral to Sell with a 12-month price target of $28, suggesting marginal downside from current levels.

The Thesis

The consensus expectations for Sunoco could be revised downward, as the consensus likely used the high end of the fuel company's gross profit margin guidance, Holder said in a Wednesday note. (See the analyst's track record here.)

Goldman is 7-, 6- and 10-percent below the consensus EBITDA expectations for 2018, 2019 and 2020, respectively.

Fundamentally, rising commodity prices and strong U.S. oil/gas/NGLs supply growth will likely lead to underperformance by the company, given that it is an MLP functioning as a wholesale distributor of motor fuels to convenience stores and other customers, Holder said.

Higher prices could impact Sunoco by way of weaker consumer demand for motor fuel, the analyst said.

Goldman sees other MLPs benefiting disproportionately from strong production, given the supply-push nature of their cash flow.

"Further, from 2018-20, we estimate SUN to have a weaker-than-average balance sheet of 5.0x net debt/EBITDA (vs. 3.8x MLP average), distribution coverage below 1x (vs MLP avg of 1.2-1.3x) and a below-average return profile of 10 percent (vs. 12 percent for MLPs), which we believe warrants a valuation discount."