On Tuesday, Mizuho Securities shifted its stance on Sunoco LP (NYSE:SUN), upgrading the stock from Neutral to Buy, while adjusting the price target to $59 from the previous $60. The move comes after Sunoco's shares experienced a notable decline, dropping 22% from their peak on March 6, in contrast to the American Energy Independence Index (AMEI), which saw a 4.8% increase during the same period.
The analyst from Mizuho highlighted Sunoco's performance, which has not reflected the positive fundamental tailwinds the company has been experiencing. The acquisition of NuStar, a more traditional refined product and crude oil Midstream Master Limited Partnership (MLP), by Sunoco, was met with a tepid reaction from investors. The analyst believes that the market's mild pushback does not warrant the extent of Sunoco's recent underperformance.
The upgrade to Buy is underpinned by the belief that Sunoco's current market valuation does not fully recognize the company's robust outlook. The analyst anticipates strong EBITDA growth in distribution, synergy potential from the NuStar acquisition, an improved balance sheet that could be worthy of investment grade, and an attractive and increasing yield.
As the market awaits further details from Sunoco's management regarding the synergies from the NuStar acquisition, Mizuho has revised its estimates upward. The forthcoming update is expected to provide more granularity on the benefits that the integration of NuStar will bring to Sunoco's operations and financial performance.
InvestingPro Insights
Amid the recent downgrade in stock price, Sunoco LP (NYSE:SUN) shows a resilience in its fundamental metrics that may capture the savvy investor's attention. With a Market Cap of $4.29 billion and a Price to Earnings (P/E) Ratio of 11.29 for the last twelve months as of Q1 2024, the company stands at a valuation that some might consider reasonable in the current market landscape. The PEG Ratio of 0.58 further indicates that the stock could be undervalued based on its earnings growth expectations.
The company's financial health, underscored by a Gross Profit Margin of 6.34% and an Operating Income Margin of 3.13%, reflects a steady operational efficiency. Moreover, the EBITDA Growth of 13.62% during the same period is a testament to Sunoco's ability to expand its earnings before interest, taxes, depreciation, and amortization, which is a positive signal for potential investors.
An InvestingPro Tip suggests that investors should consider the company's Dividend Yield of 6.89% as of 2024, which is complemented by a Dividend Growth of 6.07%. This could be particularly attractive for income-focused portfolios. Additionally, the Fair Value estimates from analysts and InvestingPro stand at $61 and $67.61 respectively, suggesting a potential upside from the previous close price of $50.87.
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