Read This Before You Buy Suburban Propane Partners, L.P. Stock

Image source: Suburban Propane.

If you're looking to buy Suburban Propane Partners, L.P. because of a fat yield and the expectation that low energy prices will rebound, you'll want to stop and rethink that decision. Why? Because Suburban Propane isn't your typical energy company. Here's what you need to understand before you buy Suburban Propane Partners.

Top versus bottomSuburban Propane is a domestic propane distributor. Although propane is often considered an afterthought in the energy market, there's a fairly large base of domestic customers using it for everything from home cookouts to drying crops and heating homes in hard-to-reach locations. But here's the thing: Suburban isn't really getting paid for propane.

Suburban is basically the middle man. It passes the costs of propane on to customers. What it gets paid for is delivering propane. Since it has to buy the propane before it delivers it, Suburban's top line will fluctuate with propane prices. This means that revenue swings from propane prices don't the impact on the bottom line nearly as much as total volumes sold -- which is more a function of the weather.

But this little fact sets up an odd dynamic. Low propane prices are a good thing for Suburban. That's because the fuel is slowly being replaced in the United States by other power options, including fuel cells, natural gas, batteries, and even electric heating. When propane prices are low, however, customers are less likely to shift to a different option. This is a dynamic that you should understand, particularly if energy prices head higher, since that will boost top-line results but could be detrimental for the partnership's long-term outlook. A very different dynamic than what you'd find at an oil driller.

It's been kind of hot latelyThat brings up another issue you need to get a handle on -- the weather. Because a significant amount of propane demand comes from heating applications, winter temperatures are a key driver of volume delivered. That's the metric that will have the most impact on the bottom line.

Retail propane gallons sold

2015 2014 2013
480,372 530,743 534,621

Data source: Suburban Propane.

The past couple of winters have been fairly warm, and that's led to lower volumes. For example, in the company's fiscal first quarter, ended in December, volumes sold fell roughly 18%. That's pretty much in line with peers such as Ferrellgas Partners , where volumes fell about 16% in its fiscal second quarter, ended in January.

Note that those quarterly periods aren't aligned with the calendar year. That's because the heating season is so important that each company has shifted its fiscal year around the winter months. That said, the volume declines are, clearly, a bad thing. But should we have a cold winter, Suburban and Ferrellgas should see a nice boost to demand and, more important, delivery needs. So if you're watching Suburban, you'll also want to keep a close eye on the weather.

Offsetting displacementI mentioned that propane is being displaced by other fuels. That's a long-term negative for the industry. However, Suburban, Ferrellgas, and their other large peers haven't been sitting idly by waiting for their businesses to die. Ferrellgas, for example, has closed over 200 acquisitions since 1986. Although Suburban Propane does little deals, too, its big move was to roughly double its size in 2012, when it bought Inergy's propane business. That move basically pushed it into the top players.

Image source: Suburban Propane.

So as you look at Suburban, you'll want to keep an eye on the acquisition front. It needs to keep buying up smaller players so it can grow and, perhaps equally important, offset the long-term demand decline in the industry. (It completed another, smaller deal in its fiscal first quarter, by the way.) More important, there's still plenty of room for acquisitions, since the top 10 propane distributors control only around 40% of the U.S. market, according to competitor AmeriGas Partners .

Know this before you pull the triggerSo before you buy Suburban Propane Partners units, you'll want to make sure you understand how the company differs from other energy players. For example, the price of propane is important to the top line, but less so to the bottom line. In fact, low prices actually help mitigate customer defections. Weather is a far more important determinant of delivery volume, which will have a greater impact on the bottom line than propane prices. And last but certainly not least, acquisitions are a key factor for propane companies as they look to both grow and offset slowly declining demand. Once you understand these dynamics, feel free to move forward with your buying plans.

The article Read This Before You Buy Suburban Propane Partners, L.P. Stock originally appeared on

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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