We came across a bullish thesis on UGI Corporation (UGI) on Substack by Investing 501. In this article, we will summarize the bulls’ thesis on UGI. UGI Corporation (UGI)’s share was trading at $30.55 as of Jan 21st. UGI’s trailing and forward P/E were 24.44 and 10.26 respectively according to Yahoo Finance.
Aerial view of a natural gas production facility with travelling pipelines extending from it.
UGI Corporation, a diversified energy services provider, is currently at a pivotal moment as it seeks to address the challenges stemming from its 2019 acquisition of AmeriGas. This acquisition, originally intended to bolster UGI’s earnings and strategic positioning, has underperformed significantly. AmeriGas’ EBITDA has declined from $584 million in 2019 to $320 million in 2024, with EBITDA margins falling from 21.8% to 14.1% over the same period. Contributing factors include poor execution, customer attrition, and warmer weather reducing propane demand. These issues have led to a 30% decline in retail gallons sold and $850 million in goodwill impairments, effectively erasing nearly half of the initial goodwill value associated with the acquisition.
Despite these setbacks, UGI’s management has taken decisive steps to address the AmeriGas situation. A new CEO, Bob Flexon, and AmeriGas President, Michael Sharp, were recently appointed, bringing extensive utility and operational experience. Flexon’s leadership history includes roles at Dynegy and PG&E Corporation, where he oversaw significant restructurings and operational turnarounds. Sharp, with his track record in asset management and operational optimization, is expected to drive transformative changes at AmeriGas, focusing on operational efficiency and customer service improvements. Their partnership, shaped by previous collaboration at Dynegy, is seen as a catalyst for stabilizing AmeriGas and potentially positioning it for a strategic sale.
While AmeriGas has struggled, UGI’s other business segments have performed well. The Utilities division has grown EBITDA from $230 million in 2019 to $400 million in 2024, while the Midstream & Marketing and International LPG divisions have also seen steady EBITDA growth. These segments are not only profitable but also represent attractive acquisition candidates. However, any potential acquirer is likely to wait for the resolution of the AmeriGas challenges, either through stabilization or divestiture, before pursuing the rest of UGI’s portfolio.
The strategic importance of resolving the AmeriGas situation cannot be overstated. Selling AmeriGas would allow UGI to focus on its core businesses, which are growing and profitable. A divestiture could also unlock significant value for shareholders by removing the overhang associated with AmeriGas’ underperformance. Moreover, proceeds from a sale could be used to pay down UGI’s debt, which currently stands at $7.1 billion, reducing leverage and strengthening the company’s balance sheet. UGI’s current valuation, with an enterprise value-to-EBITDA multiple of 7.8x, reflects the market’s skepticism, but this discount could quickly reverse with tangible progress at AmeriGas.
From an investor’s perspective, UGI offers a compelling risk/reward profile. The company’s dividend yield of 5% is well-covered by cash flow, providing a degree of downside protection. Furthermore, the stock’s price-to-earnings ratio of 10x is among the lowest in the regulated natural gas utility sector, suggesting a potential for re-rating as AmeriGas issues are addressed. If AmeriGas stabilizes or is sold, UGI’s stock could see a substantial increase in value, with analysts projecting a potential 30-50% upside. A re-rating to a 3% dividend yield or 15x earnings per share could elevate the stock price significantly, unlocking value for long-term shareholders.
The challenges faced by AmeriGas highlight the risks inherent in large-scale acquisitions, but they also present an opportunity. Under new leadership, UGI has a chance to turn a troubled division into a source of value creation. The next steps will be critical, as management focuses on stabilizing AmeriGas while leveraging the strength of its core divisions. Investors who believe in the potential for a turnaround may find UGI’s current valuation an attractive entry point, with multiple catalysts for upside and a solid dividend yield providing a margin of safety.
UGI Corporation (UGI) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 26 hedge fund portfolios held UGI at the end of the third quarter which was 32 in the previous quarter. While we acknowledge the risk and potential of UGI as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than UGI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.