Shares inexpensive, 2Q beats Street, only issue is 3Q weakness - Goldman Sachs - August 02, 2007
News
Sunoco reported 2Q 2007 EPS of $4.20, well ahead of the $3.85 First Call consensus though just below our $4.50 forecast.
Analysis
After badly missing consensus expectations in 1Q 2007, we think many investors were again expecting Sunoco to miss Street forecasts in 2Q. The company instead delivered strong refining earnings, which more than offset lackluster results in non-refining businesses.
Implications
Sunoco shares have been hit hard over the past several weeks and at a minimum are due for a dead cat bounce. The biggest short-term issue with Sunoco is that it is particularly exposed to high East Coast product imports and currently weak European refining margins. With East Coast margins currently trending to levels less than the Street appears to be reflecting in 3Q 2007 expectations, additional patience may be required with Sunoco shares. Our price target and estimates are unchanged. With that said, we think the overall sell-off in refining equities in general and Sunoco shares specifically is overdone and we find Sunoco's current valuation extremely tempting. For now, we stick with a Neutral rating. However, should signs emerge that
(1) European refining margins are recovering and product imports to the United States easing,
(2) consensus EPS estimates for 2007 are not declining, or
(3) Sunoco's share weaken further, we would consider becoming more aggressive in adding to Sunoco shares. The difference between our recommendation to be patient with Sunoco but stay long Valero Energy (Conviction Buy) is in the fact that Sunoco is both exposed to the less attractive East Coast region of the United States and has large non-refining exposures. All else equal, our preference for Valero's diversified regional exposure and pure-play status make us more willing to stick with it through short-term volatility. |
