Adams Resources: Holding This Stock Is The Best Option (NYSE:AE)

Adams Resources & Energy, Inc. (NYSE:NYSE:AE) is engaged primarily in the marketing, transportation, terminaling, and storage of crude oil and natural gas basins. With its operations in over 48 states of the United States, Adams Resources & Energy operates through three major segments, crude oil marketing, transportation, and pipeline.

With its wholly-owned subsidiary GulfMark Energy, the company sells and delivers crude oil through over 520 tractors. Also, the company operates over nineteen truck terminals in ten states, providing it with a significant transportation network. In 2020, Adams resources acquired VEX pipeline, which has over 56 miles of 12-inch pipeline. As a result, the overall capacity of the pipeline has increased to 90,000 barrels per day.

Also, Adams Resources & Energy, Inc. has been acquiring various businesses; as per the management’s expectations, cash flow in the upcoming years might rise. But any deterioration in the crude oil prices might impact the operating results, as seen in the historical performance.

I believe Adams Resources & Energy, Inc. stock has considerable upside potential, but the risk of deteriorating operating results still persists.

Historical performance

In the last ten-year period, revenue has been significantly volatile; as the company derives its revenue primarily from crude oil marketing, revenue seems to fluctuate with the oil prices. Although the revenue seems to have decreased due to a reduction in the oil prices from 2012, the business has improved significantly, resulting from CAPEX and related acquisitions.

Due to the huge fluctuations in crude oil prices, the net profit margins have remained volatile; during sharp movements in oil prices, the company had to incur considerable losses. Therefore, such fluctuations in the operating results might affect the stock price significantly. After posting subdued average returns in the last five years, Adams Resources & Energy, Inc. has been posting desirable profits from the last few quarters; such a significant improvement is attributed to industry-wide favorable pricing.

Although the net profits have seen huge fluctuations, the company has generated significant cash flows over the underlying period, which has been providing substantial strength to the business model.

Strength in the business model

Over the period, management has been allocating the capital to expand the business reach through acquisitions and capacity addition; such effort has been driving up profit margins. As a result of consistent acquisitions over the last few years, the business model has become substantially strong.

Also, the company has been debt free for a long period. Still, as a result of increased inventory and higher spending on acquisition purposes, the long-term debt levels have increased slightly, reaching $15 million. Having a balance sheet with considerable liquid assets and low long-term debt provides significant stability to the business model.

It should be appreciated that, despite the volatile business performance, the dividend payment has increased substantially over the period, which has provided consistent returns to Adams Resources & Energy, Inc. shareholders.

Risk factors

Beginning in November 2014, crude oil prices began to decline significantly and the Company’s average crude oil purchase price dropped to $54 per barrel by December 2014 from $90 per barrel in September 2014. Declining prices continued into 2015 curtailing new drilling efforts. The combination of reduced prices and volumes caused revenues to fall 54 percent in 2015 relative to 2014.

Annual report- 2015

Over the last ten-year period, crude oil prices have seen substantial fluctuations; sharp rises and falls in the prices have been affecting the crude oil marketing companies. As a result, industry performance has been significantly volatile and is expected to remain volatile.

Historically, Adams Resources & Energy, Inc. had to face significant losses resulting from sudden crude oil prices, which reduced the overall valuation of the inventory. As the company has been expanding its footprints, overall crude oil inventory has increased significantly; as the crude oil prices are extremely volatile, any reduction in the oil prices might bring significant losses to the company.

After increasing significantly in the last two years, crude oil prices have started dropping consistently. Although the recovery in the Chinese economy is expected to drive higher prices, a further crude oil price decline may occur.

Recent development

In the recent quarter, revenue has increased from $568 million in the same quarter last year to about $852 million; a significant rise in revenue is attributed to increased revenue from the crude oil marketing segment. Also, EBITDA from the marketing and transportation segment seems attractive; as a result, net profits have increased to $2.1 million.

Furthermore, due to the strong performance during the last nine months, the company could produce significant cash flow from operations; Although the higher CFO resulted from increased payables, the overall performance seems attractive.

Recently, the company has entered into the acquisition of Firebird bulk carrier for over $33 million; the acquisition is expected to drive cash flow by over 30% in the upcoming years.

Due to its strong performance in the last few quarters, the Adams Resources & Energy, Inc. stock price has been rising consistently; after dropping to $17.2 per share in early 2020, the stock price has reached $49.58 per share, which gives it a total market value of over $121 million.

Despite such a significant rise in the stock price, I still believe there is considerable potential for the stock to grow. As the management is allocating the company’s capital through acquisition, these acquired entities might bring substantial cash flows to the business.

In the last nine months, the company has produced over $10 million in net profits, which gives it an earning multiple of 12 based on its previous nine months’ earnings.

Furthermore, if oil prices start dropping, the earning power of the business might get affected; as a result, the Adams Resources & Energy, Inc. stock price might experience a considerable correction. Also, the strong EBITDA from the transportation business is attributed to industry-wide favorable pricing; any reduction in the pricing might affect the margins.

Therefore, after considering all the points, I assign hold ratings to Adams Resources & Energy, Inc. stock.