Sunoco Logistics Gets Bullish Boost From Morgan Stanley, Valuation 'Compelling'

In a report published Tuesday, Morgan Stanley analyst Brian Lasky upgraded the rating on

from Equal-weight to Overweight, while maintaining the price target at $48. While the stock valuation is compelling at present, there is also an increasing possibility of additional project-related catalysts. Following the release of the company's 1Q earnings report, along with the announcement that Sunoco Logistics would participate on the Dakota Access Pipeline, the share price dropped 14.5 percent. In addition, there have been concerns regarding the company's high growth peers, as well as Sunoco Logistics' participation in M&A activities. "We believe these concerns are transitory and have overshadowed a strategically located asset base that is only getting more valuable. As a result, the risk reward has become increasingly attractive and we believe catalysts could come sooner rather than later, elongating their robust organic growth profile," Lasky stated. The stock has been underperforming despite the over $4 billion in growth capex secured by the company in the last few months. Although the industry has been witnessing challenges to backlogs, the analyst believes that Sunoco Logistics' robust regional and commodity diversification would drive project development, going forward. The analyst also believes that the sustainability of the company's growth is underappreciated by the market. With most of the growth already underwritten, Sunoco Logistics offers "best in class visibility." There is also potential to offset some of the company's funding needs through internally generated DCF, as well as third party M&A. "While we expect some noise in the quarter (marketing, Mid Valley), we will see the reverse impacts from the inventory timing adjustment and ramp ups in contribution from Mariner South, ME1, Allegheny Access, PE2, and Eaglebine/Granite Wash, which should improve (distribution coverage)," Lasky added.