While oil stocks have been the best performers in 2022, Sunoco has struggled. The stock is down 11% this year, but Mizuho has confidence in it. On Thursday, the firm upgraded Sunoco’s shares from neutral to buy, citing the company’s business model, balance sheet strength and compelling distribution yield. In the long term, the company’s resilient business model “should prove resilient,” Mizuho’s Gabriel Moran said in a note. “The strong 2020 operating performance gives us confidence in Sun’s earnings strength,” he added. “Certainly the current background presents a new challenge that will further define the volume versus margin interaction on Sun’s financial results. But the severity of demand destruction in 2020 and Sun’s subsequent EBITDA growth (+11% y/y) ) There was compelling evidence of this. We believe the partnership’s business model flexibility.” He also noted that rising prices and demand destruction over the long term are mutually exclusive, and the company may only be penalized for one or the other. The firm attributes the sell-off in Sunoco’s shares this year to concerns about how rising fuel prices could affect its wholesale margins. However, the stock’s performance this month has focused more on demand destruction, Moren said. Sunoco shares are down more than 12% in June. “In other words, Sun thinks it has suffered the worst of both worlds in terms of investor sentiment, and we believe both cannot be true at the same time for an extended period of time. are,” he said. “There may be a short-term scenario where margins shrink and volumes decline, but the economic feedback loop is self-correcting. Overall, we have no reason to doubt Sun’s earnings resilience.” To be sure, Mizuho trimmed its price target on the shares from $46 to $44, “embedding some conservatism around demand destruction and increasing interest expense given Sun’s high-model revolver borrowings.” For,” said Moren. The new target implies up 21% from Thursday’s close. —CNBC’s Michael Bloom contributed reporting.
