SUN - Sunoco: IDR Burden Offsets Solid Business Fundamentals

2024-06-19 06:56:08 ET

Summary

• Sunoco LP shares have performed well over the past year, but have generated just a 10% return compared to the market's 30% gain since my last article.
• Recent acquisitions and transactions have diversified and enlarged Sunoco's business, with a reaffirmed adjusted EBITDA guidance and increased synergies from NuStar.
• Sunoco's fee-based cash flows provide predictability, but incremental IDR payments limit long-term distribution growth potential, likely making it a market performer.

Shares of Sunoco LP ( SUN ) have been a solid performer over the past year, rising about 23%, though they are down about 10% from their high. I last formally covered Sunoco in November , rating shares a hold, given my view income growth prospects were limited. Since then, SUN has returned 10% vs the market’s 30% gain. While a moderate total return is in keeping with my expectations, given the magnitude of underperformance, one could argue a “sell” rating would have been more appropriate. I also discussed Sunoco in regards to its acquisition of NuStar in January, reiterating it as a hold. With a 6.4% yield and several M&A actions, now is an opportune time to revisit SUN. While the business has performed well, structural concerns leave me at a hold....

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