The Sum of Sunoco’s Parts
Web Editor, "Mad Money"
Sunoco might be worth a whole lot more if it were broken up, Cramer said during Monday’s Mad Money.
He got the idea after reviewing Alimentation Couche-Tard’s nearly $2 billion bid for Casey’s General Stores. Alimentation Couche-Tard wants Casey’s 1,500 Midwest convenience stores to increase its scale and the company, better known in the US as Circle K, was willing to pay $1.3 million per unit. Given that number, Cramer thinks Sunoco’s 4,700 stores throughout the East Coast and Midwest – and Sunoco itself – right now are grossly undervalued.
Sunoco’s market cap is $3.6 billion, or less than $3 billion if you subtract its stake in Sunoco Logistics Partners, its pipeline master limited partnership (MLP). But the stores alone would be worth $6.1 billion if they fetched the same price that Alimentation Couche-Tard is paying for Casey’s. And that’s excluding Sunoco’s refining, logistics, coking coal and chemicals businesses.
Cramer called the Alimentation Couche-Tard offer “an eye opener,” saying it shows that now Sunoco’s parts are worth more than the whole. And the analysts who cover the stock – there’s one “buy,” 11 “holds,” and four “underperforms” on SUN right now – just “don’t realize the break-up value that’s hidden within its assets.” So he broke down the company so that Mad Money viewers would.
Sunoco’s refining business, which makes up 53% of sales, could be very attractive to the Valeros and Tesoros of the world. Refining margins have finally bottomed, and the company’s shutdown of two facilities, in New Jersey and Oklahoma, have allowed for reduced costs and an increase in its capacity utilization rate to 85% from 74%. Refiners “can make a lot of money,” Cramer said, when those facilities are running full tilt.
Retail marketing, or the gas stations/convenience stores, is responsible for 28% of sales. The scale of this operation is “simply enormous,” Cramer said, and it would give a company like Alimentation Couche-Tard pricing power with its suppliers. The more Circle Ks there are, the easier it is for AC-T to demand lower prices from Pepsico . Also, Sunoco is raising cash by divesting some of its least favored stores, collecting $120 million in 2009 with another $80 million expected over the next two years.
The logistics business is conducted through Sunoco Logistics Partners, a publicly traded MLP with 2,200 miles of refined product pipelines, 3,800 miles of crude pipelines, 21.2 million barrels of crude oil storage capacity and 41 refined-product terminals. Sunoco owns 33% of the MLP, and it generates 13% of the company’s revenues.
In early February, Sunoco sold off half its chemicals division, which accounts for 4% of sales, to Braskem for $350 million in cash. But it kept its hands in phenol, a chemical used in making plastics. “That could be a hot business when plastics take off,” Cramer said, “and they are.”
There is also Sunoco’s coking, or metallurgical, coal business, which comprises 2% of revenues. Met coal is used in the production of steel, and Cramer is, to say the least, enthusiastic about this commodity, with his favorite play being Walter Energy . Sunoco’s coking division last quarter was up 179% from a year ago, and up 123% from the previous quarter. Cramer called this business a “hidden gem,” especially given the high demand and low supply for met.
Lastly, great management always adds to a company’s value in Cramer’s book. And Sunoco has that in Lynn Elsenhans, who took over in August 2008. She and her team have been cutting costs, shutting down underperforming refineries and raising cash by partially monetizing the company’s logistical assets.
If Casey’s General is worth $2 billion, Cramer said, then there’s no doubt that Sunoco’s assets are undervalued. Again, the parts here are worth a whole lot more than the whole.
“That makes Sunoco to me a buy, buy, buy,” Cramer said.
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