Investors should look out for these trends
A multitude of trends in the propane industry could result in both weaker earnings and stock price depreciation for names such as AmeriGas (APU), Suburban Propane (SPH), and Ferrellgas Partners (FGP). Market Realist has identified and explained the eight major trends we see as potentially damaging.
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A warm winter could sap propane demand
The NOAA’s preliminary forecasts for this winter are for warmer-than-normal temperatures, which if realized would be negative for propane demand.
Higher propane costs could cause lower sales volumes
Propane is currently more expensive than last season, with significant risk of trending higher. A continued move higher would be negative for propane demand.
Higher propane price volatility is a risk to distributors
Propane prices are more volatile, and we view the risk of sudden movements upward as higher than the inverse. A sudden move upward in propane prices could reduce propane distributors’ margins, as price increases can’t immediately pass on in some instances.
Higher oil prices are a potential double whammy
Higher oil prices mean higher gasoline prices (which eat into consumers’ budgets) and more expensive propane (which reduces propane distributors’ sales volumes). A continued move higher in oil prices would be negative.
Higher borrowing costs could deter acquisition activity
The cost of borrowing funds is still low from historical standards, but it has been trending higher. Higher borrowing costs can make acquisitions look less attractive, affecting propane distributors’ growth prospects.
The higher interest rate environment makes refinancing more costly
Rates on propane bonds have increased, reducing the opportunity to save on interest expense. A further move upward in rates would be negative.
Upward move in Treasury rates hurts yield names like propane MLPs
Investors buy propane distributors for yield, which means higher Treasury rates could result in stock price depreciation. Higher Treasury rates could eventually affect the share prices of propane names.
Broad economic woes and slow housing starts can affect propane sales
A weak economy could affect housing starts and sap consumer purchasing power. This hurts propane, as a portion of newly constructed residences require propane for home heating.