Valuation High on Sunoco Logistics
Sunoco Logistics Partners L.P. (SXL) reported strong first-quarter 2008 results, primarily due to high oil prices and good performance from its Western Pipeline segment. Sunoco reported better-than-expected first-quarter 2008 earnings of $43.2 million or $1.07 per limited partner diluted unit (our estimate was for $0.84 per unit), compared to $22.3 million or $0.70 per limited partner diluted unit in the prior-year period and $35.8 million or $0.94 per limited partner diluted unit in the previous quarter. We have adjusted the reported earnings of $0.97 per limited partner diluted unit for impairment charges of $0.1 per unit.
Importantly, the partnership announced an 8.5% year-over-year increase in quarterly distribution to the annualized run rate of $3.58 per unit, reflecting its positive distribution-growth profile. We are, however, maintaining our Hold recommendation on SXL units given their premium valuation relative to peers and their relatively modest long-term distribution-growth prospects. Our preferred names in this space remain
Enterprise (EPD),
NuStar (NS), and
TC PipeLines (TCLP). The relatively unfavorable macro backdrop characterized by restricted access to capital continues to weigh on the entire market in general and MLPs in particular.
As a result, yield spreads have widened significantly for the entire group. On a distribution yield basis, SXL common units are currently trading at a premium to its peer pipeline MLP group average. This represents a 296 basis-point (bps) spread over the 10-year Treasury bond, compared to the peer group's average spread of 318 bps. Our new $50 target price (up from $49) reflects an annualized distribution run rate of $3.83 per unit, 7% above current levels, and a target yield of 7.70%. Our yield assumption is based on a 320 bps spread over our 10-year Treasury bond yield expectation of 4.50%.
Some Caution for CV Therapeutics
Headquartered in Palo Alto, CA, CV Therapeutics, Inc. (CVTX) is a biopharmaceutical company focused on applying molecular cardiology to the discovery, development and commercialization of novel, small molecule drugs for the treatment of cardiovascular diseases. Several big regulatory decisions are expected for CVT in 2008. The first came in April 2008 with the approval of Lexiscan for MPI.
Also in April 2008, the CHMP/EMEA gave the thumbs up to Ranexa for sale in Europe. However, the big decisions are coming in July 2008 when the FDA is set to rule on three NDA/sNDAs for expanding the Ranexa label. Our call is that investors should Hold onto the shares at this level as fundamentals are improving.
The Street is pretty split on CVT right now. We are in the moderately positive camp, believing that Ranexa will eventually pick up steam after the label expansion(s). We remind investors, there are three separate applications here one for first-line angina, one for a potential anti-arrhythmic claim, and another for use in diabetics with coronary disease. The first-line angina sNDA and the anti-arrhythmic claim look solid in our view.
