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By Siraj Sarwar

Sunoco Logistics Partners L.P. (NYSE:SXL) is one of the most successful companies in the U.S. Its success is well reflected in the stock's performance. The stock returned more than 50% in the last year alone. The stock's accumulated market return in the last four years stands at almost 500%. As an MLP, the company pays distributions with a projected yield of 3.6%. In this article, I analyze the company's long-term business prospects to see whether it can be a good long-term investment. Let's first take a look at the company's current business model and future plans.

Business Model

Sunoco Logistics Partners owns and operates a diverse portfolio of pipeline, terminal and marketing assets. It also employs patented butane blending technology. The company's business is characterized by a solid business model and long-term customer contracts. On the whole, the company has strong flexible capital structure to support growth.

Sunoco aims to generate stable cash flows and provide attractive returns to investors. The company works on a strong business plan. Strategies for growth contain escalating asset utilization through efficient, competitive transportation and storage services. Additionally, the company continues to pursue opportunities arising from market dislocations. Sunoco also has plans to expand its platform through complementary asset acquisitions and organic extensions.

Dividend Profile

Sunoco Logistics has a long history of continually increasing its cash distributions. Recently, the company raised the quarterly cash dividends by 5% over the previous quarter. Presently, the partnership pays off $2.18 in annual cash distributions, bringing the trailing yield to 3.25%. The company's five-year dividend growth stands at 10.6%. Sunoco has been committed to growing ratable cash flow for the partnership, and distributing that cash to unit holders.

Furthermore, Sunoco is ranked as the top dividend stock by dividend channel. Sunoco shares display both strong profitability metrics and attractive valuation metrics. The company has favorable long-term, multi-year growth rates in key fundamental data points. Let's dig into the company's financial data to evaluate its ability to sustain similar returns in the future.

Financial Analysis

Over the years, strong demand for crude oil business generated incredible numbers for the company. The company has a smart business plan, and all of its assets are attractively positioned across its footprint. Sunoco is always looking to optimize its asset usage. The company's successful strategies of asset allocations are generating good figures.

Figures in Millions

TTM

2011

2010

Revenue

13,330

10,918

7,838

Gross Margin

841

654

440

Operating Income

590

436

301

Net Income

457

313

346

Morningstar.com

As the above chart demonstrates, the company has been generating increasing amounts of revenue. The company revenues are expanding at an positive pace. In 2010, Sunoco has generated $7.83 billion in revenue, which increased to $13.33 billion in the trailing 12 months. As the above table demonstrates, the company has low margin on sales. However, operating margin is much better for the company.

The company is not losing cash in business cycles. At the end of Q3, the company's operating income reached record levels thanks to an improved mix pipeline. Moreover, margins are also expanding for the company mainly due to the high-margin assets acquired from Texon L.P. Above all, Sunoco is generating substantial profits, which keep increasing over the years. The fooling table shows the company's cash situation.

Figures in Million

TTM

2011

2010

Operating cash flow

$626

$430

$341

Capital Expenditure

$326

$213

$174

Free Cash Flow

$300

$217

$167

Morningstar.com

As the table shows, cash flows are strong for the MLP. Cash flows from operations have demonstrated impressive growth over the previous two years. In the trailing 12 months, the company has returned $242 million worth of dividends to its shareholders. Moreover, free cash flows present an adequate cover to its cash distributions. Free cash flows for the same period stood at $300 million. Furthermore, the partnership has made considerable capital expenditures in growth opportunities for the long-term gains.

Looking at the company's health can give us a clear picture about the long-term health of the company. The below chart demonstrates key matrices.

Latest Quarter

2011

2010

Current Ratio

1.07

0.99

1.05

Quick Ratio

0.94

0.87

0.99

Financial Leverage

3.93

5.00

4.34

Debt/Equity

1.18

1.32

1.27

Morningstar.com

At the moment, the company has a relatively stable financial situation. However, the debt raised in the previous few years due to the expansion strategies. At the end of Q3, the company's long-term debt stood at $14.4 billion. The company's current and quick ratio looks to be in a stable position. Both ratios are in the line of the industry average. Moreover, the company has significant cash flows, which adequately cover debt obligations.

Industry Peers

Sunoco Logistics' main industry peers are Enterprise Product Partners (NYSE:EPD), Kinder Morgan (NYSE:KMI), and Enbridge (NYSE:ENB).

SXL

EPD

KMI

ENB

Price/Earnings TTM

15.9

19.5

26.7

43.5

Price/Book

4.5

3.9

2.8

5.3

Price/Sales TTM

0.5

1.1

3.4

1.9

EPS Growth (3 Yr Avg)

7.4

9

0.0

-10.6

ROE TTM

31.5

20.7

2,8

11.0

Morningstar.com

Sunoco is trading at attractive multiples compared to its industry peers. It is also relatively cheaper based on the P/E and P/S ratios. One striking attribute is the return on equity. Sunoco was able to generate a return on equity of 31.5%, which is well above its peers.

Risks

One of the biggest risks Sunoco Logistics faces is customer concentration. Sunoco Logistics is highly dependent on its parent company, Sunoco (SUN), for distribution services. While the merger of Energy Transfer Partners (ETP) with Sunoco created a larger customer base, ETP's plan with Sunoco is still uncertain.

Amidst this uncertainty, the SXL stock returned more than 60% in the last year alone. Currently, with a relative strength index (RSI) of 76.63, the stock is deep into over-bought territory. Buying a stock when it is already overbought can initiate a short-term disappointment. Therefore, it is better to wait until this hot stock cools down a bit.

Another drawback is the low profit margin in the MLP industry. Similar to its peers, Sunoco Logistics supports a profit margin of only 3.5%. A small reduction in this already-low profit margin can be highly costly to company's shareholders.

Summary

As Morningstar suggests, investors could have all sorts of reasons for looking at Sunoco Logistics Partners. They may like the company's yield, or perhaps the leading distribution jump and the history of consistently increasing distribution. I agree with Morningstar when it comes to Sunoco. Its assets are relatively stable, and the management knows how to transform these assets into profits.

The company has the potential to raise its distributions substantially over the next several years. Nevertheless, the stock is already in the overbought territory. Also, falling oil prices can serve as a negative catalyst. Therefore, I think, a price under $50 can serve as a smarter entry point.

Source: Sunoco Logistics Partners Still A Good Buy For The Long Haul