Streetwise for May 2,  2010

Streetwise

Lauren Rudd

Sunday, May 2, 2010

Greed and Political Bias Run Rampant

The heated rhetoric from Wall Street over the prospect of regulatory reform is often little more than a reflection of a particular orator’s greed and political bias. Those who complain bitterly that increased governmental regulation will suffocate the ability of the Street to operate in an efficient and competitive manner are espousing ignorance, are clueless, or hope that you are.

I could tell you that I was surprised by the emails attributed to the traders at Goldman Sachs but I was not. They remind me of what I pick up when I walk my dogs. The so called Fabulous Fab was not fabulous; he just dealt from the bottom of a deck of marked cards. The brokerage industry has been guilty of treating the less informed individual investor in the same manner for years, just on a smaller scale.

Furthermore, call it an epiphany of sorts but the complacency you may have once found possible because of the conviction that the share prices of quality companies are destined to rise in the long run, despite the shifting sands of time, is extinct. Therefore, it is understandable if you are a bit nervous and twitchy about investing.

Nonetheless, you need to not only create and regularly add to a stock portfolio, you need to actively manage your investments with an eye towards the symbiotic relationship your portfolio has with the economy. Moreover, do not be bashful about taking profits as you redefine your asset allocation strategy. At the same time avoid the pitfalls of trading. Each sell decision requires a subsequent buy decision, which doubles your chance for error.

A strong dividend yield is certainly the preferential avenue of choice, all other factors being equal. However, the investment decision is often far from ideal and the potential for capital appreciation, sans dividends, can make for a compelling story.

A good compromise is Suburban Propane Partners LP (SPH). Although technically a publicly traded master limited partnership with units that trade just like shares of stock, the company has an enviable record in both capital appreciation and dividends.

Suburban distributes propane and other refined fuels. In business since 1928, the company serves approximately 850,000 customers from 300 locations in 30 states. When I last wrote about Suburban a year ago, my 2009 earnings estimate was $4.35 per unit with a 12-month target price of $44. Earnings came in at $4.96 per unit and the units recently closed at $48.85.

For the first quarter of its 2010 fiscal year ended December 26, 2009, net income was $1.37 per unit, as compared to $ $2.46 a year ago. The downturn was characterized by rising commodity prices, the continued adverse affects of the weak economy and warmer than normal temperatures.

Revenues were $301.4 million, a decrease of $61.9 million, or 17 percent when compared to the prior year. All working capital requirements were funded with free cash and the company ended the first quarter with more than $115 million of cash on hand.

The intrinsic value of the units, using a discounted earnings model is $66. To arrive at that number, assume that earnings of $165.2 million grow at an annual rate of 5 percent. You then discount those future earnings at a rate of 12 percent to arrive at a net present value for the company's next 10 years of earnings of $1.78 billion.

To account for potential earnings beyond the 10th year, I used a growth rate of 6.00 percent and a discount rate of 12.00 percent, resulting in a continuing value of $1.53 billion. Add those two numbers together, subtract out long-term debt of $349.4 million and divide by the 35.3 million outstanding units. The more conservative free cash flow to the firm model, which can be found at www.ValuePro.net, yields an intrinsic value of $65 per unit.