Rating Update: Stock Rating A-Highest (5/10/19)-Ultrapar Participacoes SA (UGP).

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BUSINESS

Ultrapar Participacoes S.A. engages in gas distribution, fuel distribution, chemicals, storage, and drugstores businesses in Brazil, Mexico, United Stated, Uruguay, and Venezuela. The company’s Gas Distribution segment distributes liquefied petroleum gas to residential, commercial, and industrial consumers, as well as independent dealers, primarily in the South, Southeast, and Northeast regions of Brazil. Its Fuel Distribution segment distributes and markets gasoline, ethanol, diesel, fuel oil, kerosene, natural gas for vehicles, and lubricants and related activities through a network of 8,005 Ipiranga service stations. The company’s Chemicals segment produces ethylene oxide and its derivatives, as well as fatty alcohols, which are raw materials used in the home and personal care, agrochemical, paints, varnishes, and other industries.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be above the cost of capital, UGP is expected to continue to be a major Value Builder.

UGP has a current Value Trend Rating of A (Highest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing inconsistent signals. UGP has a neutral Appreciation Score of 56 but a very high Power Rating of 88, and the Highest Value Trend Rating results.

UGP’s stock is selling below targeted value. The current stock price of $5.49 compares to targeted value 12 months forward of $7.
This neutral appreciation potential results in an appreciation score of 56 (44% of the universe has greater appreciation potential.)
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UGP has a Power Rating of 88. (UGP’s very high Power Rating indicates that it has a higher likelihood of achieving favorable investment performance over the near to intermediate term than all but 12% of companies in the universe.)
Factors contributing to this very high Power Rating include: is in an extremely strong phase current; and recent price action has been extremely favorable. An offsetting factor is the trend in UGP’s earnings estimates has been unfavorable in recent months.

INVESTMENT PROFILE

UGP’s financial strength is above average. Financial strength rating is 62.
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Relative to the S&P 500 Composite, Ultrapar Participacoes SA has moderate Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that UGP is normal risk. Low stock price volatility is a positive for UGP. Relative weaknesses include: low financial strength, high financial leverage, low expected growth, and low historical growth. UGP’s valuation is moderate: moderate dividend yield, moderate P/E ratio, and moderate price/book ratio. UGP has unusually low market capitalization.

CURRENT SIGNALS

UGP’s current operations are eroding. Return on equity is falling, reflecting: falling asset utilization; declining pretax margin; falling tax keep rate; and falling leverage.

UGP’s current technical position is very weak. The stock price is in a 3.0 month down move. The stock has declined 24.1% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Ultrapar Participacoes SA (NYSE: UGP) suffers from limited negative changes in fundamentals. Negative developments: significant quarterly sales deceleration occurred, and the consensus estimate for December, 2019 decreased significantly. Positive development: the consensus estimate for December, 2020 increased significantly.
The stock is currently rated A.
On 5/10/19, Ultrapar Participacoes SA (NYSE: UGP) stock suffered a major decline of -13.3%, closing at $0.06. Moreover, this decline was accompanied by above average trading volume at 144% of normal. Relative to the market the stock has been exceptionally strong over the last nine months and is unchanged during the last week.

CASH FLOW

In 2018, UGP experienced a slight decrease in cash of -$143.3 million (-8%). Sources of cash were slightly lower than uses. Cash generated from 2018 EBITDA totalled +$674.2 million. Non-operating sources contributed +$239.2 million (+35% of EBITDA). Cash taxes consumed -$174.2 million (-26% of EBITDA). Withdrawal of investment from the business totalled +$239.9 million (+36% of EBITDA). On a net basis, debt investors received -$433.3 million (-64% of EBITDA) while equity investors removed -$689.0 million (-102% of EBITDA).
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UGP’s Non-operating Income, %EBITDA has exhibited a minor overall uptrend over the period. This improvement was accompanied by stability for the Ultrapar Participacoes Sa Peer Group. (Since 2015 Non-operating Income, %EBITDA has sharply accelerated.) In most years, UGP was in the top quartile. Currently, UGP is upper quartile at +35% of EBITDA (+$239.2 million).

UGP’s Cash Taxes, %EBITDA has experienced a small downtrend over the period. This downtrend was accompanied by stability for the Ultrapar Participacoes Sa Peer Group. In most years, UGP was in the top quartile. Currently, UGP is lower quartile at -26% of EBITDA (-$174.2 million).

UGP’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Ultrapar Participacoes Sa Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, UGP was in the top quartile and second quartile. Currently, UGP is upper quartile at +36% of EBITDA (+$239.9 million).

UGP’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Ultrapar Participacoes Sa Peer Group. (Since 2016 Debt Investors, %EBITDA has accelerated very sharply.) In most years, UGP was in the top quartile and lower quartile. Currently, UGP is lower quartile at -64% of EBITDA (-$433.3 million).

UGP’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Ultrapar Participacoes Sa Peer Group. (Since 2016 Equity Investors, %EBITDA has accelerated very sharply.) In most years, UGP was in the top quartile and lower quartile. Currently, UGP is lower quartile at -102% of EBITDA (-$689.0 million).

UGP’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Ultrapar Participacoes Sa Peer Group. (Since 2016 Change in Cash, %EBITDA has accelerated very sharply.) In most years, UGP was in the top quartile and lower quartile. Currently, UGP is lower quartile at -21% of EBITDA (-$143.3 million).
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UGP’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Ultrapar Participacoes Sa Peer Group as well. In most years, UGP was in the second quartile and top quartile. Currently, UGP is at the upper quartile at +7%.

PROFITABILITY

UGP’s return on equity has improved slightly since 2009 but it experienced a very sharp decline after the 2015 high.
This slight improvement was due to small negative trend in pretax operating return and small positive trend in non-operating factors.
The productivity of UGP’s assets declined over the full period 2009-2018: asset turnover has experienced a minor downtrend.
Additionally, pretax margin has exhibited little to no overall change even as it experienced a very sharp decline from the 2015 level.
Non-operating factors (income taxes and financial leverage) had a minor positive influence on return on equity.
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UGP’s return on equity is above median (12.2%) for the four quarters ended December, 2018.
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Operating performance (pretax return on assets) is above median (5.8%) reflecting asset turnover that is upper quartile (2.97X) and substantially below median pretax margin (2.0%).
Tax “keep” rate (income tax management) is lower quartile (65.0%) resulting in after tax return on assets that is slightly above median.
Financial leverage (leverage) is at median (3.23X).

GROWTH RATES

There are no significant differences between Ultrapar Participacoes SA’s longer term growth and growth in recent years.
Ultrapar Participacoes SA’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been -4.3% per year. (More recently it has been 4.0%.)

Total asset growth has been -2.8% per year. (More recently it has been 8.9%.)

Annual E.P.S. growth has been -0.9% per year. (More recently it has been -14.6%.)

Equity growth has been -5.8% per year. (More recently it has been 3.3%.)

Ultrapar Participacoes SA’s consensus growth rate forecast (average of Wall Street analysts) is 3.9% — substantially above the average of the historical growth measures.
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Relative to the Ultrapar Participacoes Sa Peer Group, UGP’s historical growth measures are consistently lower quartile. Revenue growth (-4.3%) has been lower quartile. Total asset growth (-2.8%) has been lower quartile. E.P.S. growth (-0.9%) has been lower quartile. Equity growth (-5.8%) has been lower quartile.

In agreement with this pattern, consensus growth forecast (3.9%) is at the lower quartile.
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PRICE HISTORY

Over the full time period, Ultrapar Participacoes SA’s stock price performance has been variable and below market. Between July, 2008 and May, 2019, Ultrapar Participacoes SA’s stock price rose +21%; relative to the market, this was a -47% loss. Significant price moves during the period: 1) January, 2018 – September, 2018: -64%; and 2) October, 2008 – April, 2013: +477%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -36.3% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through April, 2019 of -36.3% is lower quartile relative to Ultrapar Participacoes SA Peer Group.

Current 5-year total return performance of -13.4% is lower quartile relative to the S&P 500 Composite.
Through April, 2019, with lower quartile current 5-year total return of -13.4% relative to S&P 500 Composite, UGP’s total return performance is lower quartile relative to Ultrapar Participacoes SA Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, UGP’s overall valuation is low. The highest factor, the price/earnings ratio, is at median. Price/equity ratio is below median. Ratio of enterprise value/earnings before interest and taxes is near the lower quartile. Ratio of enterprise value/assets is below median. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.
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UGP has a major value gap compared to the median valuation. For UGP to rise to median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.35X to 0.49X. If UGP’s ratio of enterprise value/revenue were to rise to 0.49X, its stock price would be lower by $3 to $8.
For UGP to hit lower quartile valuation relative to the Ultrapar Participacoes SA Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 0.35X to 0.29X. If UGP’s ratio of enterprise value/revenue were to fall to 0.29X, its stock price would decline by $-1 from the current level of $5.49.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be above the cost of capital, UGP is expected to continue to be a major Value Builder.
Ultrapar Participacoes SA’s current Price Target of $8 represents a +37% change from the current price of $5.49.
This neutral appreciation potential results in an appreciation score of 56 (44% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 56, the high Power Rating of 88 results in an Value Trend Rating of A.
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Ultrapar Participacoes SA’s current Price Target is $8 (+54% from the 2018 Target of $5 and +37% from the 05/10/19 price of $5.49). This dramatic rise in the Target is the result of a +1% increase in the equity base and a +52% increase in the price/equity multiple. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple and the forecasted increase in growth has a large positive impact as well. Partially offsetting these Drivers, the forecasted increase in cost of equity has a very large negative impact.
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PTR’s return on equity forecast is 22.8% — above our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly above the 2010 low of 9%.

PTR’s growth forecast is 3.0% — above our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 23%.

PTR’s cost of equity forecast is 9.3% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2010 and 2018. The current forecast is steady at the 2011 peak of 10.2%.
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At Ultrapar Participacoes SA’s current price of $5.49, investors are placing a positive value of $0 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 1.0% per year, and a return on equity of 14.5% versus a cost of equity of 7.6%.
PTR’s 2020 Price Target of $8 is based on these forecasts and reflects an estimated value of existing assets of $6 and a value of future investments of $2.

About John Lafferty 52821 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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