By most standards, the latest quarter was not a good one for Inergy (Nasdaq: NRGY). But in the up-and-down world of propane wholesaling and retailing, it's best to take a longer view.
Propane is used for space and water heating, and its use is highly seasonal, with the leanest quarters coming in the spring and summer. Quarterly net losses are normal. Inergy's primary rivals, AmeriGas (NYSE: APU), Ferrellgas (NYSE: FGP), and Suburban Propane Partners (NYSE: SPH), rank among the top four in the industry, and they consistently post one or two negative quarters every year.
For the fiscal fourth quarter, Inergy delivered a net loss of $28.3 million on revenue of $273.5 million. That's not pretty, but it beats the $30.3 million loss on $245 million in revenue posted a year earlier. Importantly, Inergy's midstream operations, which include gas storage facilities and refining operations, added $17.4 million to gross profit, up from $11.2 million a year earlier. (More on that shortly.)
For the full year, Inergy enjoyed a respectable showing, delivering net income of $67 million, up from $9.8 million a year earlier, despite a meager increase in retail propane volumes. Along the way, the company managed to boost gross margin by 235 basis points and operating margin by 338 basis points.
The propane industry is seasonal, offering little growth potential, so Inergy's strategy is two-pronged. First, it looks to expand its propane business by acquisition, snapping up dozens of propane operators since 1996. There seems to be plenty of room to grow in this fragmented market, where the top five companies account for less than one-third of the market. Second, Inergy plans to reduce its dependence on propane by expanding its midstream operations, including gas storage and refining of natural gas liquids.
Midstream operations currently account for only 19% of cash flows, but if planned expansions and acquisitions go as expected, management expects that figure will rise to 34% within a few years. This will help smooth out the ups and downs of the company's earnings, though it will still leave Inergy much more vulnerable to seasonal effects than peer and Income Investor selection Energy Transfer Partners (NYSE: ETP), which gets only 10% of its revenue from retail propane operations. Still, I think that Inergy's hefty dividend - currently 7.5% -- and increasingly stable earnings make this one worth investigating further.
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