May 8th, 2005
Analyst: Naveen Sikka
Ian Madsen, MBA, CFA, Editor
1-800-767-3771 ext. 417;
www.zackspro.com 155 North Wacker Drive l Chicago, IL 60606
Ferrellgas Partners L.P. (FGP-NYSE) $21.45
Overview
Ferrellgas Partners, L.P. is a holding company and conducts activities through Ferrellgas, L.P. The consolidated subsidiaries of the Company include Ferrellgas Partners Finance Corp., Ferrellgas, L.P. and Ferrellgas Finance Corp. The Company is a distributor of propane and related equipment, and supplies to customers primarily in the United States. The operations primarily include the distribution and sale of propane and related equipment. The propane distribution business includes transporting propane purchased from third parties to the retail distribution outlets and from there to tanks on the propane customers' premises. The portable tank exchange operations provide a nationally branded portable tank exchange through a distributor network of independent and owned distributorships. It serves more than one million residential, industrial/commercial, portable tank exchange, agricultural and other customers. The Company is based in Overland Park, KS and employs over 4,300 people. For more information about the Company, visit its website at www.ferrellgas.com.
Analysts have identified the following factors for evaluating investment merits of FGP.
Key Positive Arguments / Key Negative Arguments· FGP expects the Renaissance technology rollout to be complete by the end of FY’05 (July); annual cost savings said to be ~$30MM
· Analysts are forecasting a greater-than-1X coverage ratio beginning in FY2006 (more in-line with the propane peer group)
· Company recently announced an extension of its distribution priority; common unitholders will receive distributions before any others are paid, agreement extended until April 30, 2010 / · Company’s 80% debt-to-capital ratio considered extremely high; high debt levels will make it difficult to acquire new entities
· Distribution growth is expected to be nil for the next few years as the Company deals with its high debt load
· Most analysts have lowered EPU/EPS forecasts due to warmer weather forecasts and changing consumer sentiment (higher price elasticity in recent quarters given record high propane prices)
· Integration risks associated with Blue Rhino acquisition persist
The Company recently reported lower-than-expected Q2’05 results. EPU came in at $1.02, one cent below consensus and drastically lower than the $1.67 reported in the year-ago period. Warmer weather induced conservation by customers in general, which pressured bottom-line results. Record high propane prices lead to higher margins, which partially offset the weaker results. Many analysts have lowered FY2005 EPS/EPU estimates due to weak 1H’05 results and expectations for continued conservationist behavior implemented by propane customers, as prices remain relatively high. Management has indicated that its recent acquisition of Blue Rhino will begin to contribute to the bottom-line in the 2H’05 and lead to annual cost savings of ~$30MM starting in FY2006. Analysts also applauded the recent move by management to extend its distribution priority until 2010. This ensures that common unitholders will be entitled to receive any distributions before the parent company (which holds almost 18M units).
Revenues
Total Revenues
Fiscal Year Ends: July$ in millions / Q1’05A / Q2’05A / Q3’05E / Q4’05E / FY2005E / FY2006E
Digest High / 359.7 / 656.3 / 544.1 / 298.2 / 1868.0 / 1906.1
Digest Low / 359.7 / 656.3 / 462.6 / 264.6 / 1478.0 / 1537.0
Digest Average / 359.7 / 656.3 / 503.4 / 281.4 / 1721.1 / 1735.8
Digest Average YoY Growth / nf / nf / nf / nf / 24.80% / 0.85%
Analysts are forecasting solid double-digit sales growth in FY2005 due to the recent acquisition of Blue Rhino, which is said to be accretive to both the top and bottom-lines. For FY2006, analysts are forecasting flat sales growth due to warmer weather assumptions and conservative demand expectations given a fundamental shift in retail propane customers’ purchasing habits (becoming more conservationist).
Please refer to Zacks Research Digest spreadsheet for specific revenue estimates.
Margins
FY2004A / FY2005E / FY2006EOperating Margin / 8.45% / 6.43% / 8.85%
Analysts are forecasting a decrease in OM for FY2005 as the Company endures integration costs associated with the Blue Rhino acquisition. For FY2006, analysts are forecasting a marked increase in the OM due to acquisition synergies from the Blue Rhino acquisition. Management has recently stated that cost synergies should begin to take shape in the 2H’05.
Please refer to Zacks Research Digest spreadsheet for more details on margin estimates.
Earnings Per Unit
Fiscal Year Ends: July$ in millions / 1Q05A / 2Q05A / 3Q05E / 4Q05E / FY2005E / FY2006E
Zacks consensus / (0.71) / 1.02
Digest High EPS / (0.69) / 1.06 / 0.60 / (0.35) / 0.65 / 1.10
Digest Low EPS / (0.71) / 0.88 / 0.55 / (0.90) / (0.28) / 0.50
Digest Average / (0.71) / 0.99 / 0.57 / (0.58) / 0.26 / 0.85
Digest Average YoY Growth / -32.4% / -38.3% / -9.3% / 42.2% / -48.9% / 222.8%
Please refer to Zacks Research Digest spreadsheet for more extensive EPS figures.
Target Price/Valuation
Target prices for FGP stock range from $21 to $24 with an average of $22.33. The most common valuation method used by the covering analysts is a targeted yield of between 8.5%-9.3%. Analysts note that the partnership continues to be valued at a much deeper discount than the propane peer group (which is trading around a 6%-7% yield) given FGP’s high debt levels.
Please refer to Zacks Research Digest Spreadsheet for further details on valuation.
Long-Term Growth
Long term growth rates for FGP range from 1% to 5%. The Company’s growth is contingent upon further acquisitions, increased retail demand of propane, and a healthy US economy. With high debt levels (80% debt/cap ratio), analysts feel FGP will have a difficult time growing earnings/cash flows over the next several years. Instead, management will likely focus on de-leveraging strategies; namely selling off non-core assets and maintaining a tight nuse on operating expenses. Analysts currently forecast flat distribution growth for the next couple years as the Company focuses on debt repayment. The Blue Rhino acquisition is expected to yeild long-term cost synergies, however, integration risk is still a concern and there is limited long-term visibility with regards to earnings growth potential as a result of the acquisition.
Individual Analyst Opinions
POSITIVE RATINGS
UBS (03/09/05) – The stock is rated a BUY with a $22 price target.
NEUTRAL RATINGS
AG Edwards (03/11/05) – The stock is rated a HOLD with no given price target.
Smith Barney (03/09/05) – The stock is rated a HOLD with a $21 price target. Analyst remains concerned about the Company’s high leverage and a weaker outlook in the back half of FY2005.
Wachovia (03/10/05) – The stock is rated MARKET PERFORM with a $19-$23 price target range. Analyst recently upgraded the shares from a negative rating and raised his valuation range given a reduced risk profile of the partnership (distribution extension for common unitholders and non-core asset sales designed to address financial leverage).
NEGATIVE RATINGS
Goldman (03/10/05) – The stock is rated UNDERPERFORM with no given price target. Analyst is concerned about a lack of future distribution growth and an apparent deterioration beginning to occur in the core business.
Lehman (03/09/05) – The stock is rated UNDERWEIGHT with a $24 price target. Analyst is negative on the partnership given its below-average ability to grow distributions and the fact that investors are “gravitating” to higher distribution growth propane partnerships.
Raymond James (04/15/05) – The stock is rated UNDERPERFORM with no given price target. Analyst is concerned that the Company’s high debt load will make it difficult to grow distributions and to acquire new assets.
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