Recent Insider Action in the Propane Market
Joshua is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Looking at the actions of insiders is one of the best ways to confirm the direction of a company and its' future stock price. After the great recession of 2008 insiders bought and correctly played the rebound. As they have a first-hand look at the internal workings of their respective companies they have an advantage over the average retail investor. Currently the majority of insiders are selling. Although they are selling in the aggregate that does not mean that there are not opportunities in some sectors. AmeriGas (NYSE: APU) and Ferrellgas (NYSE: FGP) operate in the propane market throughout United States. Recent insider transactions in these companies have not been massive as the market value of purchased stocks at AmeriGas (NYSE: APU) were under 1 million dollars. Regardless, insider purchases in an environment where the majority are selling are strong signals and should be examined.
The quarterly PE ratio for retail propane distributors can be rather deceiving due to the quarter to quarter volatility in the demand for their services. The majority of their money is made in the 1st and 4th quarter of the year. Taking the average of the yearly EPS of AmeriGas (NYSE: APU) in 2010 and 2011 gives a yearly EPS of $1.74 and the current stock price at around $41 gives a PE ratio of 23. Given the average S&P 500 of 16 makes this company somewhat expensive relative to the broad market. The total debt to equity ratio is 1.55 which is reasonable relative to competitive. The debt to equity ratio is close to that of competitors like UGI Corp (NYSE: UGI) which is at 1.66. Ferrellgas (NYSE: FGP) has a very high total debt to equity ratio of 22.65. With an average EPS of over the past 3 years $.39 and their current stock price of $20 they have a normalized PE ratio of 51. Given their large debt load and high PE ratio the stock looks rather risky. Although revenue has grown 6 to 7 percent per year over the past couple years, EPS has remained volatile and hasn’t shown the same growth. Even with insider purchases Ferrellgas (NYSE: FGP) appears to be very risky with such a high debt load and high PE ratio.
Suburban Propane (NYSE: SPH) is another retail propane distributor which has seen serious insider action. A number of directors and other insiders have decided to decrease their holdings though they have not cashed out completely. The senior vice president Micheal Keating is one of the biggest sellers and he decreased his holding by 30%. The average EPS over the past 2 years is $2.89 which at the current stock price of $38 gives a PE ratio of 13. The total debt to equity ratio is healthy at 1.03. The insider action at this company is rather interesting as it has a lower debt load and a better PE ratio than APU yet insiders are selling and not buying. One thing to note is that the price point where the insiders sold is between $48 to $41, which is above the current price.
This year AmeriGas (NYSE: APU) and Suburban Propane (NYSE: SPH) had a very difficult season as a warm winter and warm spring decreased demand for propane. In a way this company sounds like a classic value play where the short term circumstances of a very warm winter and spring may have caused the market to overreact. Still, AmeriGas (NYSE: APU) seems rather expensive with a 2 year normalized PE ratio of 23. Given the positive insider action and reasonable debt load, this stock deserves a second look if its PE ratio drops to a more reasonable level. With the lack of significant insider selling at Suburban Propane (NYSE: SPH), a PE ratio of 13, and a relatively low debt load I believe this company is currently a buy.
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