EUR 850.00 For Business Accounts Only

Morningstar | Suburban's First-Half Results in Line With Our Expectations

Suburban Propane's lack of an economic moat is the product of industry dynamics, low natural gas prices, and the company's need to acquire businesses to offset organic volume declines. We view the outlook for Suburban's business negatively. We forecast low natural gas prices in our long-term outlook, which we believe will continue to pressure the company's core business.High propane prices relative to alternatives such as electricity and natural gas could speed propane usage declines as gas infrastructure spreads. Suburban's leverage over customers should support per-unit margins that help to offset usage declines. The propane industry is also still very fragmented--the top four players control roughly 40% of the market, leaving room for growth by acquisition. However, greater size will mean it takes bigger deals to move the needle. If secular usage declines persist off a larger customer pool, then replacing volumes becomes harder, requiring larger deals at potentially higher valuations. This makes value creation more difficult even for a management team that has managed the business well despite these headwinds. Leverage continues to be an industrywide concern. Management is slowly approaching its 4.0 debt/EBITDA leverage target. We think this is attainable absent any significant unfavorable weather. High leverage, volume fluctuations from weather, and organic sales declines will likely mean little in the way of distribution increases. We don't incorporate meaningful increases in distribution in our five-year forecast.We expect usage to decline 1.5% annually after a return to normal usage during the next five years. Headwinds from conservation will remain strong, owing to volatile propane prices and encroachment by electricity and natural gas.