SGU - Star Group: High Valuation And Slowing Sales

2023-08-16 03:05:27 ET

Summary

• Star Group experienced a significant drop in sales and volumes due to warmer weather impacting demand, with revenues decreasing by over 30% YoY.
• The company operates in the residential and commercial heating and air conditioning market, offering a range of products and services.
• SGU has a history of acquisitions and share buybacks, but the inconsistent operating income and high valuation make it a risky investment.

Investment Rundown

It seems that the market did not appreciate the latest report coming from Star Group, L.P. ( SGU ) which showcased the company experiencing a slow in sales and volumes, which seems to be caused by the impact warmer weathers are having on demand. The company saw the revenues drop by over 30% YoY which is very worrying to see, to say the least. Going forward I think that SGU will have a lot of challenges to overcome.

Customer retention and showcasing an ability to pass on expenses downward are what will keep them alive. The poor performance seems to have caused the share price to drop, but the valuation remains highly elevated at a p/e of over 80. The company is priced like high-growth stock but none of the results show for it. I think the company looks incredibly risky right now to invest in and consolidating at these levels seems unlikely if we have more poor earnings reports from them. I am as a conclusion rating the company a sell.

Company Segments

SGU. is operating in the residential and commercial heating and air conditioning market, offering a variety of products and services across the United States. The company's offerings are focused on diverse energy needs for both residential and commercial customers, which include home heating oil, propane, diesel fuel, and gasoline. Additionally, SGU has grown its services to include plumbing solutions, along with the installation, maintenance, and repair of heating and air conditioning equipment.

Currently, the company's reach covers a significant customer base, including both residential and commercial sectors. An impressive achievement is the coverage of full-service solutions to approximately 415,900 customers, including residential and commercial clients seeking reliable home heating oil and propane services.

SGU has been active to drive growth through its strategic Star Group Mergers and Acquisitions Summary . The company acquired two new companies in this period, a continuation of its momentum from the five deals it sealed during FY2022. This pattern of consistent acquisitions underscores the company's commitment to expanding its portfolio and market presence. It seems that driving value for shareholders will be done through these measures. In 2022 the cash acquisitions amounted to $13.1 million and in 2021 it was $40.7 million.

This doesn't seem to have resulted in consistent growth for the company. There remain to be a lot of inconsistencies in the companies operating income as we can see from the chart above here. Without that, it's difficult to justify the company as a decent investment.

While the heating oil industry may not be expected to have rapid growth, it is important to realize that this business model comes with its own set of advantages. The positives come in the shape of low capital expenditure requirements. Unlike sectors that demand significant ongoing investments, the heating oil business operates on a foundation of existing infrastructure, minimizing the need for constant and substantial capex.

This streamlined operational approach allows companies like SGU to focus their resources more effectively, generating substantial FCF. This strong cash generation acts as a key driver behind SGU's ability to execute two significant financial strategies: distributing substantial dividends and buying back shares.

The possibility for the company to buy back substantial amounts of shares seems to be a leading cause for the high multiple it receives. However, I am not convinced it is enough to justify the buy case, perhaps a hold eventually if the company reaches lower levels. But I just find the downside here to be large enough if headwinds continue that the share buybacks won't have the desired effect that one would hope.

Earnings Highlights

Looking at the performance from the last quarter it becomes clear that SGU has some difficulties in the current market climate. Revenues landed at $300 million, a decrease of 31% which was caused by both lower volumes but also lower average selling prices.

Looking at the price chart for heating oil it becomes clear that the last quarter was hard to compare YoY as the prices were quite elevated in 2022, which seems correlated with the war in Ukraine somewhat, as many commodity prices shot up. We are seemingly heading higher as the colder months of the year approach and expecting a QoQ growth in revenues going into Q4 is reasonable.

Looking closer at the quarter it's noticeable that the elevated prices last year more than helped offset some of the lower volumes. YTD EBITDA for SGU is $12.8 million, compared to $128 million last year. For the quarter the CEO Jeff Woosnam had the following to say, "Year-to-date, temperatures were the third warmest on record over the past 123 years in the New York City metropolitan area, impacting overall results. However, we are in a very strong position from a liquidity standpoint given that product costs are down approximately $0.60 per gallon year-over-year".

I think the coming quarters will need to display strength in terms of EBITDA growth for the share buybacks to continue. It seems likely we will continue having shifting weather conditions as we have had so far in 2023 and that will put a constraint on earrings, but in some cases also create opportunities. However, it's the uncertainty that I don't appreciate and that is one of the reasons, besides the valuation, that I am staying out.

Final Words

SGU is a rather niched company that has direct exposure to the demand and sales of heating oil. Seeing as warmer weather has an impact on earnings and overall results the coming years will be interesting to watch in terms of the company developments.

SGU has a great history of buying back shares, but constrained earnings caused by weather shifts might make that task difficult. Besides that, the valuation of the business I think is unreasonably high and that makes me rather stay out completely than hold shares. The downside seems large and I am rating it a sell, unfortunately. But I do have to admit if the company does prove it can maintain solid FCF through these challenges and continue buying back shares, then I might miss on gains from this one, but it's a risk I am willing to take.

For further details see: