A Solid Concrete Winner

09/08/2008 12:00 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

Jack Adamo, editor of Jack Adamo’s Insiders Plus, says a maker of asphalt has strong potential to move higher.

NuStar Energy LP (NYSE: NS) delivered better-than-expected earnings, primarily due to stronger asphalt margins and higher asphalt volumes sold. The company expects several storage expansion projects to be completed by the end of the third quarter, which should add approximately $20 million to operating income in 2008.

The firm took a large write-off in the second quarter to buy back hedges on asphalt, but expects to recover that loss in the third quarter by receiving the higher prices now available in the market. It forecasts third-quarter prices averaging between $625 and $700 per short ton, compared with $450 per short ton in the second quarter.

In my view, the sticky wicket in the asphalt business, which makes up the majority of NuStar’s revenues, is that most of its work comes from governments. Government at every level is strapped for cash nowadays, [so] for the next year or two, repaving projects could get postponed, due to budgetary constraints.

The company says that demand [should] rebound strongly afterwards, since the longer those projects are put off, the worse road conditions become, thereby requiring more repair. In the meantime, however, earnings may suffer. The stock is firming lately, which may represent the aggregate view of the smart money that things will be reasonably good during the recession period.

Longer term, it should be fine, but I’d wait to see how the stock acts going into late September before I’d start or add to a position.

NuStar [recently] announced that the partnership expects to report record earnings for the third quarter of at least $2.25 per unit, primarily as a result of exceptionally strong asphalt margins. It also said it believes current analyst consensus estimates for the full year of 2008 remain too low. It expects to use a portion of the excess cash flows to repay debt from its acquisition of CITGO’s asphalt business.

While I’m ecstatic about the results, I would not assume everything will be easy [in the future]. Much of the government expenditures made recently are probably from last year’s budget. The year ahead will tell the tale.

It is okay to buy the stock here for its 8% yield; just realize that, while its long-term prospects remain excellent, the company could face some bumps in the intermediate term, and a small cut in the dividend is not out of the question.

As long as you’re comfortable riding out those kinds of problems over the next couple of years, I think you’ll be happy owning the units. NuStar Energy LP is a Buy up to $61. (It closed above $49 Friday—Editor.)

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