The stock of Sunoco LP (NYSE:SUN, 30-year Financials) is estimated to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $35.51 per share and the market cap of $3.5 billion, Sunoco LP stock appears to be significantly overvalued. GF Value for Sunoco LP is shown in the chart below.
Because Sunoco LP is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 2.9% over the past five years.
Link: These companies may deliever higher future returns at reduced risk.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Sunoco LP has a cash-to-debt ratio of 0.03, which ranks worse than 88% of the companies in Oil & Gas industry. Based on this, GuruFocus ranks Sunoco LP's financial strength as 4 out of 10, suggesting poor balance sheet. This is the debt and cash of Sunoco LP over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Sunoco LP has been profitable 7 over the past 10 years. Over the past twelve months, the company had a revenue of $10.7 billion and earnings of $1.59 a share. Its operating margin is 3.91%, which ranks in the middle range of the companies in Oil & Gas industry. Overall, the profitability of Sunoco LP is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Sunoco LP over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Sunoco LP is 2.9%, which ranks better than 66% of the companies in Oil & Gas industry. The 3-year average EBITDA growth is 22.7%, which ranks better than 75% of the companies in Oil & Gas industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Sunoco LP's return on invested capital is 8.15, and its cost of capital is 8.66. The historical ROIC vs WACC comparison of Sunoco LP is shown below:
Overall, Sunoco LP (NYSE:SUN, 30-year Financials) stock gives every indication of being significantly overvalued. The company's financial condition is poor and its profitability is fair. Its growth ranks better than 75% of the companies in Oil & Gas industry. To learn more about Sunoco LP stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
