Pat McKeough recently replied to a Member of his Inner Circle who wanted his advice on a Canadian stock that is a leader in its field.  

Superior Propane has grown by acquisition and seen both revenue and earnings rise. The shares yield a high 5.8%. But the stock faces risk from several sources, says Pat. The company carries high debt, and a fall in natural gas prices can cause most consumers to switch from propane.

Q: Hi Pat: I would appreciate TSI’s advice on Superior Plus Corp. Thank you.

A: SUPERIOR PLUS CORP. (symbol SPB on Toronto; www.superiorplus.com) distributes propane in Canada and the U.S. It also produces and distributes specialty chemicals, including sodium chlorate and chlor-alkali, which are used for bleaching pulp (wood fibres).

The company’s propane business operates under the Superior Propane name in Canada and Superior Plus Energy Services in the Northeastern U.S. The propane business accounts for 73% of the company’s revenue.

Superior’s specialty chemicals business operates under the ERCO Worldwide name and has eight production facilities in North America and one in Chile. ERCO is the world’s second-largest producer of sodium chlorate. Those operations account for 27% of revenue.

The company had a third business segment that distributed drywall and other construction materials. However, it sold that operation in August 2016 for $325 million U.S. to help pay down its debt.

Superior is growing its business through acquisitions. In September 2017, the company acquired Canwest Propane for $432.4 million. The deal immediately added to Superior’s cash flow and should produce $20 million in annual cost savings by 2020.

Growth stocks: New acquisition helps boost revenue and earnings

The company also made a series of smaller acquisitions in 2017: in April, it purchased Pomerleau Gas Propane Inc., a propane distributor in Quebec, for $10.7 million; in August, it acquired the assets of Yankee Inc., a propane distributor in New York, New Jersey, and Virginia, for $38.7 million; and in October, it purchased both R.W. Earhart, a propane distributor in Ohio, for $44.3 million, and International Dioxide, a manufacturer of chlorine dioxide in Rhode Island, for $14.4 million.

Superior’s revenue rose 17.9% for 2017, from $2.02 billion in 2016 to $2.34 billion. Cash flow rose 32.0%, from $189.8 million, or $1.34 a share, to $250.5 million, or $1.75.

In the quarter ended December 31, 2017, the company’s revenue rose 31.9%, to $768.9 million from $583.1 million a year earlier. Cash flow jumped 27.7%, to $98.7 million, or $0.69 a share, from $77.3 million, or $0.54. The gains were largely due to the contribution of newly acquired Canwest Propane.

Superior trades at just 6.7 times its forecast 2018 cash flow of $1.88 a share. The stock yields a high 5.8%.

However, the company faces a number of risks:

Due to the Canwest purchase, Superior’s long-term debt on December 31, 2017, was $1.02 billion, up from $510.5 million at the end of 2016. That equals a high 57% of its $1.8 billion market cap. And although propane has diverse residential and commercial uses, most propane users switch to natural gas when gas prices fall. With natural gas prices remaining low, that means Superior faces gradual shrinkage in an already-competitive market. The company’s exposure to the cyclical pulp and paper chemicals industry also adds risk.

Inner Circle recommendation: We don’t recommend Superior Plus Corp.

For our recent report on a Canadian growth stock with a positive outlook facing a possible roadblock, read U.S. trade talks could check growth for Exco Technologies.

For our views on how to focus on stocks with real growth in store, read Stocks Expected to Rise: How to pick the ones with the best growth prospects.