Ferrellgas Partners L.P.
/ (FGP-NYSE)/ Equity Research / Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 09/16/2011
Current Price (09/15/11) / $21.44
Target Price / $23.00
SUMMARY
Ferrellgas Partners has been growing through acquisitions andbyexpanding its presence. We like the partnership's strategy of pushing for acquisitions, which supplements its organic growth efforts. Since the beginning of fiscal year 2011, the partnership has already made five acquisitions. We also appreciate the partnership’s efforts at asset-liability management by lowering debt and improving liquidity. We are upgrading our recommendation for Ferrellgas to ‘Neutral’. However, we are disappointed with the partnership’spoor third quarter results. Further, we believe the absence of distribution growth for more than a decade has led the partnership to trade at a discount to its propane peers. We do not see any catalyst to change this situation in the near-term, which should affect the unit price going forward./ Equity Research / Page 1
SUMMARY DATA
52-Week High / $28.9552-Week Low / $17.94
One-Year Return (%) / -6.10
Beta / 0.54
Average Daily Volume (Units) / 223,928
Units Outstanding (mil) / 76
Market Capitalization ($mil) / $1,627
Short Interest Ratio (days) / 3.05
Institutional Ownership (%) / 8
Insider Ownership (%) / 1
Annual Cash Distribution / $2.00
Distribution Yield (%) / 9.33
5-Yr. Historical Growth Rates
Sales (%) / 2.6
Earnings Per Unit (%) / 6.6
Distribution (%) / 0.0
P/E using TTM EPU / N/A
P/E using 2011 Estimate / 65.0
P/E using 2012 Estimate / 27.1
Zacks Rank *: Short Term
1 – 3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Mid-Growth
Industry / Oil Refing&Mktg
Zacks Industry Rank * / 26 out of 291
OVERVIEW
Ferrellgas Partners L.P., a master limited partnership (MLP), is a leading distributor of propane and related equipment in the U.S. As of fiscal year-end 2010, it served over 1 million customers in all 50 states, the District of Columbia, Puerto Rico and Canada. The partnership provides propane services to: Residential, Industrial, Portable Tank Exchange, Agricultural and Wholesale customers. Its geographical focuses are the Midwest, Southwest, Southeast and Northwest areas of the U.S. The company is headquartered in Overland Park, Kansas. Ferrellgas Inc. is the general partner and Ferrellgas L.P. is the operating partner of Ferrellgas Partners L.P.
The partnership’s distribution business transports propane purchased from third parties to propane distribution locations, and then to tanks at customers’ premises or to portable propane tanks delivered nationwide and to local retailers. The company conducts its portable tank exchange operations under the brand name Blue Rhino through a network of independent and partnership-owned distribution outlets. Its propane is used for various applications, including space heating, water heating, and cooking in the residential and industrial/commercial markets; for outdoor cooking using gas grills in the portable tank exchange market; for crop drying, space heating, irrigation, and weed control in the agricultural market; and as an engine fuel.
The partnership’s strategy is relatively simple: achieve operating efficiencies through the utilization of technology in its operations; capitalize on its national presence and economies of scale; expand its operations through disciplined acquisitions and internal growth; and align employee interest with investors through significant employee ownership (employees own approximately 30% of the outstanding units through an Employee Stock Ownership Trust).
Propane is primarily used for heating during the cooler months and grilling during the warmer months. With propane’s dominant use being heating, the partnership’s sales and profits, similar to all other propane marketers, are concentrated in the winter months, which for Ferrellgas correspond to its fiscal second and third quarters.
REASONS TO BUY
Acquisitions have been the growth catalyst for Ferrellgas for more than 40 years. Having completed more than 225 acquisitions, Ferrellgas has grown from a single-location, independently-owned propane retailer to a publicly-traded company, becoming one of the largest propane companies in the U.S. While ProAm, Blue Rhino, Vanson LLC, etc. are some of the best names added to the partnership’s assets in the past, the partnership continued its acquisition trend by adding five more propane businesses in fiscal 2011. Recent acquisitions include Kings River Propane, Bennett Gas Company, Dubois, and Wyoming based independent propane dealer Ram Propane. More recently the partnership acquired a Florida-based independentpropane retailer Williams Panhandle Propane.
Ferrellgas has also made progress in improving operating efficiencies, which should help its cost base. The partnership initially conducted pilot programs of its new Renaissance system technology initiative in limited geographic regions, and began full deployment in fiscal year 2004. The partnership now operates virtually all of its retail propane distribution outlets on this new technology platform. Ferrellgas expects cost savings and other benefits from this new technology platform will help contribute more than $30 million annually to its earnings.
Ferrellgas continues to be focused on its near and long-term liquidity to support its business strategies. It appears that the partnership adopts a restructuring plan for its balance sheet and aims to lower the debt levels. In the reported quarter the partnership issued common units to redeem its outstanding debts, while in the second quarter 2011 the partnership had issued a low interest bearing debt and used the proceeds to redeem its high interest bearing debts. During the third quarter, Ferrellgas Partners issued 5.1 million common units and utilized the proceeds to redeem $98.0 million of its $280.0 million 8.625% fixed rate senior notes due 2020. These actions have helped strengthened the partnership’s balance sheet and improved its liquidity position.
REASONS TO SELL
Ferrellgas has not raised its distribution rate since going public in June 1994. The partnership’s distribution rate has remained at $2.00 per share with a yield of 9.33%, while its MLP peers with similar yields have delivered healthy distribution growth in that time. With slim chances for distribution growth at the moment, we believe any deterioration in markets may affect the partnership’s unit price as investors have a tendency of shifting to MLPs with better distribution growth potential.
The propane distribution business is highly competitive due to relatively low entry barriers. Ferrellgas competes with a number of large national and regional firms, along with several thousand small independent firms and new entrants. In addition, the company faces competition from other sources of energy, some of which are less costly for equivalent energy value. The company competes for customers against suppliers of electricity, natural gas and fuel oil.
Weather conditions have a significant impact on the demand for propane. This makes the company’s financial performance vulnerable to warm winters and unfavorable weather in the grilling season. Sustained warmer-than-normal temperatures during winter, or dry or warm weather during the harvest season, would result in reduced propane usage, significantly impacting the company’s propane sales and realized profits. Also, sustained periods of poor weather, particularly in the grilling season, can negatively affect the company’s portable tank exchange revenues.
RECENT NEWS
Quarterly Distribution – August 26, 2011
Ferrellgas Partners declared a fourth quarter 2011 cash distribution of $0.50 per unit. The distribution was paid on September 14, 2011, to unitholders of record as of September 07, 2011. Ferrellgas' annualized distribution is currently $2.00 per common unit.
Ferrellgas Expands Propane Business – July 21, 2011
Master limited partnership (MLP) Ferrellgas Partners L.P. marches ahead with its strategy of acquiring new businesses that complement its portfolio. The partnership, yesterday, announced the signing of a deal to acquire Williams Panhandle Propane, a Florida-based independent propane retailer. Williams Panhandle Propane mainly has units located in Tallahassee and Carrabelle, Florida.
The acquisition opens new market areas for Ferrellgas. The acquisition is a strategic fit for Ferrellgas Partners as the partnership strives to buy assets in the vicinity of its existing operations thereby expanding its market base. This is the partnership's fifth consecutive acquisition since the start of its fiscal year, which began on August 1, 2010.
Through the acquisition of Williams Panhandle the partnership has significantly and strategically expanded in Florida's growing state capital, as well as along its Gulf coast. This acquisition also exposes the partnership to an attractive market that complements its existing operations.
The partnership follows a growth-by-acquisition strategy and has made as many as 225 acquisitions in over 70 years to transform itself from a single-location, independently owned propane retailer to one of the largest propane retailers in the United States.
Third Quarter 2011Earnings – June 07, 2011
Ferrellgas Partners LP's reported earnings per unit of $0.32 for the third quarter of fiscal 2011 fell short of the Zacks Consensus Estimate of $0.54 by $0.22.
The GAAP earnings during the quarter were $0.04 versus $0.41 in the prior year quarter. The difference between the GAAP and operating earnings during the quarter was due to the impact of a non-recurring charge for the extinguishment of debt and litigation reserve.
Total Revenue
Ferrellgas Partners' total revenue of $732.4 million in the quarter was 19.0% higher than $615.3 million reported in the comparable year-ago period. On a segmental basis, propane and other gas liquids sales increased 20.8% to $647.7 million and other revenue increased 6.7% to $84.7 million.
The results of the partnership were also higher than the Zacks Consensus Estimate of $698 million.
Operating Highlights
Ferrellgas Partners' gross profit during the quarter declined 9.4% from the comparable quarter last year to $189.2 million. The 33.6% increase in input costs to $543.2 million was primarily responsible for the decline in gross margin.
Operating expense in the quarter decreased 2.3% year over year to $103.8 million. The Equipment lease expense increased to $3.7 million from $3.3 million in the prior-year quarter.
The partnership incurred $24.9 million as interest expense during the third quarter versus $25.9 million in the year-earlier quarter. The decrease in interest expenses resulted from repayment of debts.
Adjusted net income during the reported quarter was $73.9 million versus $88.2 million in the year-ago quarter.
Financial Highlights
Cash and cash equivalents of the partnership were up marginally from the year-ago level. Cash and cash equivalents as of April 30, 2011 were $13.3 million versus $10.6 million as of April 30, 2010. The partnership's long-term debt as of April 30, 2011 was $1.03 billion compared to $1.1 billion as of April 30, 2010.
During the quarter, Ferrellgas Partners issued 5.1 million common units and utilized the proceeds to redeem $98.0 million of its $280.0 million 8.625% fixed rate senior notes due 2020.
VALUATION
Ferrellgas has not raised its distributions of late. While recent acquisitions have the potential to generate strong cash flows, we believe that the first priority for excess cash will remain debt repayment and not higher distributions. The partnership has historically traded at a discount to its propane peers due to lack of distribution growth, and we do not see any near-term catalyst that would change this relationship. Moreover, we see increased competition for Ferrellgas from within and outside (natural gas distributors) the industry.
Impressed with the partnership’s growth-through-acquisition strategy and its efforts to manage its balance sheet we upgrade our recommendation from ‘Underperform’ to ‘Neutral’.Our $23 target price reflects a P/E multiple of 29.1 basedon 2012 EPU.
Key Indicators
Earnings Surprise and Estimate Revision History
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DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of FGP. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1030 companies covered: Outperform - 14.9%, Neutral - 77.9%, Underperform – 6.2%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
/ Equity Research / Page 1