Disclosure: I am bullish on SPH and hold a large position in call options. This document is for entertainment purposes only! I am not an investment advisor. Please do your own research and seek professional investment advice for your portfolio. None of the following statements should be interpreted as financial advice or investment recommendations.
In August of 2020, I released a document outlining a propane consumption trend, following the outbreak of COVID-19 in the U.S as well as the record natural disasters in 2020. I highlighted Suburban Propane Partners as the most effective trade in the space. I bought call options and sold several months later for 16x my original investment, as the price went from $12.60 to $18.10. My original thesis was that natural disasters such as hurricanes, wildfires, etc. would positively impact earnings and that was true. However, another part of the thesis was the impact outdoor dining would have on propane and propane accessories. Record sales of patio heaters created a massive increase in commercial demand for propane. This was not reflected in last quarter's earnings because that didn't begin until the fall months. This quarter should reflect that trend as well as a new hoarding trend that has emerged.
Due to COVID, outdoor dining has caused an explosive demand for propane patio heaters and fire pits, which are still backordered with many retailers for the next month and have been extremely difficult to get since September. This has created a panic in the propane market and has many businesses and home owners desperately attempting to buy and store as much propane as they can. After experiencing shortages of toilet paper, hand sanitizer, masks, meat, and other goods last year, it appears that consumers are afraid of going without heat this winter. This is adding to the panic and creating a self-fulfilling prophecy, as a normal supply of propane meets an abnormally high demand.
Residential consumers across the country are experiencing a propane shortage, even when their tanks are on an auto-refill schedule with their distributor. As a result, complaints are skyrocketing and in some states legislators have even been forced to get involved. However, this crisis is only being reported on by local and regional news outlets. The mainstream media is ignoring this crisis in the propane market. They are most likely trying to avoid another hoarding situation, like the toilet paper, hand sanitizer, and mask crises last year, by keeping the shortage as quiet as possible. As a result, this crisis is currently flying under Wall Street's radar.
Let's take a quick look at the facts. Wall Street projects earnings for SPH will be 14% lower than the same quarter last year and the stock price is 33% lower than the same time in January 2020. However, Suburban Propane has beat analyst projections in both of the last two quarters. The next two earnings reports are usually the best two quarters because of the cold weather. However, I believe the outdoor dining trend has created an unusually large demand for commercial propane this year, which is driving the panic causing a shortage, so these two winter quarters could do exceptionally well. Wall Street analysts place the fair value of the stock at $19.33, which is 21% above the current stock price of $15.00.
All the social data I have collected indicates consumers are buying propane at record levels. Earnings for the months of October-December will be released on Feb 4th. Based on my research, I am expecting earnings to outperform Wall Street's projections for the 3rd time in the last year. If earnings merely equal last year's results for this same quarter, they will beat projections by 14%! But, all signs are pointing to a much stronger propane market than last year, so I am expecting earnings to beat projections by much more than 14%. Furthermore, I see no signs of these trends changing any time soon. I am predicting the price will return to the 2020 price levels in the mid $20's range, by or before May 2021. Personally, I am only in call options for February and May. But again, I am not a financial advisor so do not take this as financial advice.
Suburban Propane is rapidly becoming the market leader in clean propane. While propane is the cleanest fossil fuel, it does still produce some emissions. However, a 20% mix of a chemical called rDME (renewable dimethyl ether) can reduce the carbon intensity (CI) score of propane from 83 to 11! This is because rDME actually has a net negative carbon footprint! Last fall, Suburban Propane purchased a 39% stake in Oberon Fuels, which is a producer of rDME. "The combination of rDME’s handling properties, its ability to be produced from diverse, abundant, renewable resources, and its significant CI-reducing qualities make it an excellent choice for blending with propane." http://oberonfuels.com/dmeforpropane/#:~:text=As calculated by the California,a CI value of -278.
In light of the clean energy agenda of the new administration, I believe this is a hugely significant development for SPH that will position it as perhaps the only fossil fuel company with a clean energy focus. In addition, on January 26th, Suburban Propane registered a new logo with the US Patent Office, using a green leaf instead of their former red logo. Along with the slogan "Go green with Suburban Propane." Clearly, this is one fossil fuel company that takes the clean energy agenda very seriously. I believe this bodes well for SPH over the next few years and could mark a turning point for the company.
A new comparative analysis by the Propane Education and Research Council (PERC) has just demonstrated that trucks using propane have a lower carbon footprint than EVs, using the power grid. "The comparative analysis also reveals that MD-HD vehicles powered by renewable propane provide a lower carbon footprint solution in every U.S. state except Vermont." ... "Moreover, the analysis shows that decarbonization can be accelerated by adopting propane as the fuel of choice for MD-HD vehicles. The conclusion is supported by a lifecycle analysis of equivalent CO2eq emissions between electric and propane-fueled vehicles across the U.S." ... “While a fully renewable-based electric grid is not feasible anytime soon, propane is an effective solution today for accelerating decarbonization of transportation and other energy sectors.” ... "The U.S. should aggressively pursue immediately available decarbonization efforts using alternative fuels such as propane and dimethyl ether (DME) rather than wait on grid infrastructure improvements that are decades away from realization." https://www.bulktransporter.com/green-trends/article/21153779/perc-propane-outpaces-electric-in-green-truck-potential