Saturday, January 28, 2006

UGI Corporation (UGI) Analysis

UGI corporation is a distributor and marketer of energy products and services based in Pennsylvania. UGI is a domestic and international distributor of propane and butane. They also market and distribute natural gas and electricity and provide heating and cooling services in the eastern region of the United States.

UGI Corporation is a holding company that distributes and markets energyproducts and related services through subsidiaries and joint venture affiliates. Its subsidiaries principally operate in the following segments.

AmeriGas Propane - UGI owns 44% in AmeriGas who is the largest distributor of propane in the U.S
International Propane - UGI operates in France, Austria and has a joint venture in China
Gas Utility - The gas utility business servers customers in eastern Pennsylvania.
Electric Utility - The electric utility business servers customers in northeastern Pennsylvania. The gas and electric services are regulated by PUC.
Energy Services - The energy services business primarily caters to customers in the eastern united states.

UGI earning margins increased from 2.28% in 2001 to 3.835% in 2005. It has fluctuated between low 3% to high 2% in between. The revenues have grown 98% between 2001 and 2005. They have grown from 2.4 billion to 4.8 billion today. While the propane business is mature and is unlikely to expand further in the existing markets, growth is expected to come from the remaining businesses. The operating earnings have grown 330% in the same period. This shows in the increase in operating margins. The dividends have also grown in this period by 25%.

Since 1999, UGI has changed its business philosophy to the following. From UGI's 10-K,

"Since 1999, our strategic goals have been to grow earnings per share anddividends by focusing on the Company's core competencies as a marketer anddistributor of energy products and services. We are employing our corecompetencies from our existing businesses, as well as using our national scope,international experience, extensive asset base and access to customers, toaccelerate growth in our existing businesses, as well as related and complementary businesses."

As an investor, I like UGI's business strategy. The recent decision to acquire natural gas utility assets of Southern Energy should help bolster UGI's revenues.

The stock sports a healthy yield of 3.2% even given the rise in its price. The P/E is reasonable at 12% with a slight premium to the current growth rate. ( this could change if acquisitions go through ). The mean analyst estimate is 26.75 which still is a 20% premium to last week's closing price. The earnings growth in 2007 is expected to be about 9% higher than in 2006. The debt to equity ratio has also improved marginally over the past several years. Although, it is not guaranteed to reach the analyst estimates, given the stock's history for the past six years, it is likely to do well in the next ten years.

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