The stock of Sunoco LP (NYSE:SUN, 30-year Financials) shows every sign of being 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 $38.16 per share and the market cap of $3.8 billion, Sunoco LP stock gives every indication of being 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.
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Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company’s financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. Sunoco LP has a cash-to-debt ratio of 0.03, which which ranks worse than 89% of the companies in Oil & Gas industry. The overall financial strength of Sunoco LP is 4 out of 10, which indicates that the financial strength of Sunoco LP is poor. 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 $10.9 billion and earnings of $4.97 a share. Its operating margin is 6.44%, which ranks better than 66% of the companies in Oil & Gas industry. Overall, the profitability of Sunoco LP is ranked 6 out of 10, which indicates fair profitability. This is the revenue and net income of Sunoco LP over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term performance of a company’s stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Sunoco LP is 2.9%, which ranks better than 68% of the companies in Oil & Gas industry. The 3-year average EBITDA growth rate is 22.7%, which ranks better than 76% of the companies in Oil & Gas industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average 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. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Sunoco LP’s return on invested capital is 14.61, and its cost of capital is 8.75.
To conclude, 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 76% of the companies in Oil & Gas industry. To learn more about Sunoco LP stock, you can check out its 30-year Financials here.
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