idea #24 Sunoco

In 1998, there were 168 million shares of Sunoco stock outstanding.  Each share cost you $40 and it would earn you $1.50.  Back then, they had 5 main refineries and company-wide capabilities to process 760,000 barrels of oil per day.  Not much has changed.

Nowadays, there are only 116 million shares outstanding.  The stock costs you a lot less ($26) and will still earn you… the same $1.50 (estimates for 2010).  They still have the 5 main refineries and are capable of processing 910,000 barrels of oil per day.   Their capital structure has shifted to partially explain the share quantity change... now they have $2.4 billion in long term debt, a decade ago they had $940 million...but their debt cost them only 5% after tax now vs. 7% a decade ago. 

Meanwhile, the number of cars on the road has steadily increased by an average of 1.4% since 1960.  Three years ago Bush said the reason oil prices were skyrocketing was because of refinery shortages.  The market has certainly responded... apparently the market over-responded.  Now, they are shuttering refineries.   At the time of Bush's words, Sunoco stock traded at $70+ per share and was booking $7+ per share in earnings (10x p/e ratio! how cheap is that?!?).  The cashflow from operations is as volatile as the share price, in excess of $2 billion during peak years, and back down to the $500 million range recently.  Still, at $500 million it's substantially higher than the periods I reviewed a decade ago ($300 - $400). 

The entire refining industry is on hold:

From Tina Vital at S&P:
"U.S. demand for refined products fell by more than 3
million b/d from the peak in February 2008 to the
trough in June 2009 on a global economic
slowdown, and according to the International
Energy Agency (IEA), a minimum of 2 million b/d per
year of new refining capacity worldwide is slated to
come on stream between 2009 and 2014. With
pending changes in the U.S. vehicle fleet and
greenhouse gas (GHG) legislation, we believe U.S.
gasoline demand has peaked and will decline
through 2030, while U.S. distillate (including diesel)
demand will increase."

Sum it all up...

In 1998, Sunoco stock traded at 26x earnings and yielded 1.25%.  I'm pretty sure I was getting at least 4% in my money market account at Schwab.  At the time, I could've also bought a 10 year treasury that yielded 5.5%.  

In 2007, The world loved refineries.  Sunoco stock traded at 10x earnings and yielded 1.5%.   I think I was probably getting 3% on my money market account.  A ten year treasury yielded 4.5%  

Now, a single share of Sunoco stock is cheaper than ever ($26) and buys the largest claim *ever* on the same bunch of refinery assets, it yields 2.3%, ten year U.S. treasuries are 3.5%, cash yields zilch.  Sunoco doesn't look so bad.  Not great, but not so bad.   It may not be the bottom but it ain't the top.