Shares look inexpensive, but a bit more patience likely required - Goldman Sachs - August 03, 2007
What's changed
Sunoco reported 2Q2007 EPS of $4.20, well ahead of the $3.85 First Call consensus though just below our $4.50 forecast. We have updated our EPS forecasts to reflect lower benchmark margin assumptions for 3Q2007 and other modeling adjustments to realized margins, costs, and income from other segments for 3Q2007E through full-year 2010 normalized. Our new EPS estimates are as follows: $2.10 ($4.25 before) for 3Q2007E, $1.45 ($1.40) for 4Q2007, $8.45 ($10.85) for full-year 2007E, $11.00 ($11.30) for 2008E, $12.00 ($12.60) for 2009E, and $6.50 ($6.25) for 2010 normalized.
Implications
We find Sunoco shares to be very inexpensive, but believe some patience may be required owing to its greater exposure to East Coast refining, which we view as the least attractive region in the US. We rate its shares Neutral. In order to turn more positive on Sunoco shares, we are looking for a combination of (1) rebounding European margins;
(2) a bottom in consensus 3Q2007 EPS revisions; or
(3) a lower stock price.
Valuation
Sunoco is trading at a P/E of 8.8X actual 2006 EPS of $7.59, 7.9X 2007E EPS of $8.45, and 6.1X 2008E EPS of $11.00. Our $95 (+42%), 12-month target price (based on asset value, cash flow, and P/E) corresponds to ~9X 2008E EPS, lower valuation than the 10.8X EPS Sunoco has traded at since 2004.
Key risks
Key risk is a sustained decline in the benchmark Gulf Coast 3:2:1 (WTI) refining margin to levels under $8/bbl. We recognize that current Gulf Coast margins are just under $8/bbl, but think this will prove to be an unsustainbly low level so long as WTI oil prices are above $60/bbl.
Impact on related securities
Our lowered estimates for Sunoco, in particular for 3Q2007, are consistent with our updated Valero Energy estimates published earlier this week. |
