Insiders Bought This Utility Stock Yielding 8.9%
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William Greehey, a board member at NuStar Energy L.P. (NYSE: NS), bought 490,000 shares of the company on September 10th at an average price of $48.94. By investing nearly $24 million in NuStar (which increases his stake by about a third) rather than diversifying his investments, Greehey is signaling a good deal of confidence in the company’s future prospects. This is a theoretical reason why on a statistical basis insider trades tend to be profitable (read more about insider purchases).
However, Greehey isn’t the only insider buying shares of NuStar. According to our database of insider purchases, three other insiders have purchased the stock this month: two other Board members, and company CEO Curt Anastasio. See a history of insider purchases at NuStar Energy. This is particularly interesting to us because consensus insider purchases are particularly bullish signs. While each of these other three insiders is investing less than $100,000 in the stock, the fact that they all agree that its future prospects trump the benefits of diversification (in addition to Greehey’s commitment) is worth noting.
NuStar is a $3.5 billion market cap pipeline company, storing, refining, and transporting crude oil and oil products. Increasing production in the United States and Canada has helped the company’s business. Last quarter NuStar’s revenue increased by 20% compared to the second quarter of 2011, though rising costs drove down operating income and the company was forced to take a $250 million write-down of assets. Because of this, the company recorded a net loss versus $93 million in net income a year ago. This impairment also caused NuStar to be unprofitable for the first half of the year, despite revenue rising 29%. However, from a cash perspective the company is doing well: cash flow from operations was $32 million in the first half of the year.
Sell-side analysts expect the business to be back on track next year, with earnings per share for 2013 projected to come in at $2.80. Given the current stock price, this represents a forward price-to-earnings multiple of 18. NuStar could also be a good defensive stock for investors who are worried about macro conditions in the U.S. and worldwide: it has a beta of 0.8 and pays a dividend yield of 8.9% at current prices. The only worry about the company is whether or not it can recover and get back to the point where its market cap’s multiple on earnings is in the teens, and the broad buying by insiders indicates that people who know the company are well think that it will get there.
To get a good peer group of stocks that can be compared to NuStar, we selected Sunoco Logistics Partners L.P. (NYSE: SXL), Holly Energy Partners, L.P. (NYSE: HEP), Buckeye Partners, L.P. (NYSE: BPL), and Genesis Energy, L.P. (NYSE: GEL). These companies’ dividend yields range from 3.9% to 8.4%, so NuStar trumps all four of them on that front; as fellow pipeline companies, they all have limited exposure to the broader market and so could be considered by defensive investors as well. Their forward P/Es range from 15 to 24, placing NuStar square in the middle: Sunoco and Buckeye at 17 and 15, respectively, with Holly and Genesis at 23 and 24. This represents a convergence of analyst expectations from a wide range of trailing earnings multiples, which are as low as 14 and as high as 84. All of these companies were chosen because their market capitalizations are in the same range as NuStar’s as well.
From a pricing perspective, none of these are particularly more appealing than NuStar, so we would prefer that stock on the basis of its higher yield and the consensus insider buying we have seen.
This article is written by Matt Doiron and edited by Meena Krishnamsetty. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.