Earnings Scorecard: Sunoco

| About: Sunoco LP (SUN)

Earlier this month, oil refiner and marketer Sunoco Inc. (NYSE:SUN) announced its financial results for the fourth-quarter and year-end 2010.

Now that the analysts have had some time to ponder over the quarterly performance of Sunoco, they are weighing their estimate revisions. Below we cover the results of the recent earnings announcement, subsequent analyst estimate revisions and Zacks ratings for the outlook.

Earnings Review

On February 3, 2011, Sunoco reported better-than-expected fourth quarter 2010 results, driven by improved sales, robust performance in its refining business and benefits from its restructuring initiatives.

Earnings per share (excluding special items) came in at 11 cents, above the Zacks Consensus Estimate of 7 cents and a significant turnaround from the year-ago loss of 27 cents per share (adjusted). Quarterly revenue rose 17.7% year over year – from $8.7 billion to $10.2 billion – and was 14.3% above our projection.

For full-year 2010, the company earned $1.78 per share on revenues of $37.5 billion.

Agreement of Estimate Revisions

Despite the quarterly outperformance, analysts exhibit a strong bearish sentiment regarding Sunoco’s 2011 and 2012 outlooks. In particular, we see a notable number of estimate revisions over the past 30 days, indicating that revisions were in response to the company’s third quarter earnings release.

Out of 16 analysts covering the stock, 8 have revised their estimates for 2011 downward, while 3 have gone in the opposite direction. The trend is similar for 2012 as well. Out of 12 analysts, 4 trimmed their estimates as against 2 negative revisions.

Estimates are down for the March quarter of 2011 as well. For the current quarter, 6 of the 14 analysts have decreased their estimates over the last 30 days, compared to 4 positive adjustments.

This downtrend in estimate revisions reflect the challenging market dynamics in the refining sector stemming from continued weak demand and excess supply and the impact of rising crude prices on retail margins. Sunoco’s operational reliability issues and increased unscheduled downtime have also overshadowed the company’s strong quarterly results and gains from successful restructuring initiatives over the last two years.

Magnitude of Estimate Revisions

As a result of the analysts revising estimates downward over the past 30 days, the Zacks Consensus Estimate for fiscal 2011 has gone down by 17 cents (from $2.31 to $2.14), while for 2012, estimates have dipped by 16 cents (from $2.94 to $2.78). Meanwhile, for the first quarter of 2011, estimates have declined by 6 cents (from 32 cents to 26 cents) in the last 30 days.

Our Recommendation

Notwithstanding the strong results and the fact that market conditions are now much better than a year ago, Sunoco management admits that further challenges still remain. Recovery is expected to be slow in the U.S. and therefore the outlook for domestic refiners remains uncertain.

Though refining margins have rebounded from the year-end 2009 levels, they remain way off the levels achieved a few years ago. Taking into account above average product inventories (gasoline and distillate stocks), the imbalance between supply and demand is expected to remain in place for the next few quarters.

Being one of the largest independent refiners, Sunoco, along with Valero (NYSE:VLO) and Tesoro (NYSE:TSO), remains particularly exposed to this unfavorable macro backdrop. As such, Sunoco currently retains a Zacks #4 Rank (short-term Sell rating).

Longer-term, we maintain our Neutral recommendation on the stock.