Early Indications Make SunCoke Look Cheap

| About: Sunoco LP (SUN)

Investors looking to play the recent boom in metallurgical coke, used in steel production, will soon have a new, pure-play name to trade. Last week Sunoco (NYSE:SUN) filed a registration statement for the planned divestiture of SunCoke Energy, the firm's coke division. Sunoco will originally sell 20% of SunCoke in an IPO, and then undertake a tax-free spinoff of the remaining 80% stake to Sunoco shareholders. The deal is still in its early stages, and exact numbers for a date, official price and share count are all still unknown. The registration statement does say that the 20% stake will raise up to $100 million dollars, and there is some breakdown of SunCoke's numbers in Sunoco's annual report, so there are some numbers to base some assumptions on.

SunCoke produces over 5 million tons of coke each year, from plants in Virginia, Indiana, Ohio, Illinois and Brazil. The company is responsible for roughly 25% of the U.S. production of coke. According to Sunoco's Feb 3 earnings report, SunCoke earned $132 million in 2010, in-line with guidance. This number dips in 2011 to $90-$115 million, before rebounding to $160-$180 million in 2012. The firm is actively expanding, and the Middletown, OH plant will serve AK Steel Middletown once construction is finished sometime in the back half of 2011. The plant will also generate approximately 44MW of electricity using waste heat from coke production, which will be sold to AK Steel (NYSE:AKS).

Assuming that the IPO of SunCoke hits the ceiling of $100 million for the 20% stake, the company will be valued at roughly $500 million. That values the company at about 3 times earnings, using the projected 2012 earnings of about $170 million. Given the size of SunCoke in terms of U.S. production, and its exposure directly to Brazil, the firm is likely to receive a higher multiple from the market once it is separated from Sunoco. While the valuations for the deal will become more clear in the coming months, this is an IPO investors should be watching. Those looking to lock in shares of SunCoke now could buy Sunoco today, knowing that the 80% stake of SunCoke not sold at the IPO will be divested in a spinoff later in the year. Either way, SunCoke's early valuations look like a bargain.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.