We are downgrading
Sunoco Inc.
(
SUN
) shares to Underperform from Neutral, because of its weak business
model, geographically undiversified asset base and operational
hindrances.
In mid-January, Sunoco completed the separation of its
metallurgical coke manufacturing business, to
SunCoke Energy Inc.
(
SXC
), a 100% publicly traded company. We believe that the transfer of
SunCoke has made Sunoco a less diversified business model. As a
result, Sunoco is exposed to greater competitive risks than it was
prior to the spin-off.
In September last year, Sunoco also announced plans to put up
its Philadelphia and Marcus Hook refineries for sale, in response
to the challenging conditions in the refining market. The company
is targeting to exit its refining business in or before July
2012.
Additionally, Sunoco exhibits a weak geographic diversification.
In our view, the company's lack of exposure to the other refining
regions in the country weakens its competitive positioning. With
about three quarters of its capacity located in the Northeast, the
company's results are heavily tied to refining margins in a single
market.
We also remain apprehensive about Sunoco's performance in the
coming months as gains from successful restructuring initiatives by
management over the last two years have been overshadowed by
operational reliability issues and increased unscheduled downtime.
We expect these issues to weigh on the company's shares for some
time to come.
Our pessimistic outlook on the stock also stems from the
company's poorly performing refining and supply segment, which
incurred a heavy loss along with lower realized prices and
throughputs in the fourth quarter of 2011. Sunoco also suffers from
a greater financial risk that is showcased by a high
debt-to-capitalization ratio of 65.6%.
These negative aspects indicate that investors have little
reason to hold on to the stock at the current level.
Sunoco, which competes in the Oil Refining and Marketing
industry with firms like
Valero Energy Corp.
(
VLO
) and
Tesoro Corp.
(
TSO
), currently has a Zacks #4 Rank (Sell rating) for the short
term.
SUNOCO INC (
SUN
): Free Stock Analysis Report
SUNCOKE ENERGY (
SXC
): Free Stock Analysis Report
TESORO CORP (
TSO
): Free Stock Analysis Report
VALERO ENERGY (
VLO
): Free Stock Analysis Report
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