Will Ferrellgas Earnings Draw a Buyout Bid?

Ferrellgas (FGP) will release its quarterly report on Thursday, and income-hungry investors have taken advantage of the propane company's high yield to send share prices to their top levels since 2011. Yet even with Ferrellgas earnings expected to come in negative in the company's traditional slow period of the year, the time could be ripe for bigger rivals Suburban Propane (SPH 0.46%) or AmeriGas (APU) to make a bid to extend their reach across the industry by seeking to buy the company.

Ferrellgas has an impressive dividend, but its business is pretty simple. The company sells propane both through traditional channels for home heating as well as through its Blue Rhino distribution system for grills and other small-scale household use. That model has helped the master limited partnership produce an impressive distribution yield that tops those of Suburban Propane and AmeriGas. But in a fragmented industry, further consolidation could make sense to help build bigger economies of scale. Let's take an early look at what's been happening with Ferrellgas over the past quarter and what we're likely to see in its report.

Stats on Ferrellgas

Source: Yahoo! Finance.

Will Ferrellgas earnings flare up this quarter?
Analysts have become somewhat more enthusiastic about Ferrellgas earnings prospects in recent months, cutting their loss expectations for the quarter that ended in July and boosting full-year fiscal 2014 projections by a nickel per share. The company's units have returned about 4% since late June, with about half of that coming from the MLP's quarterly $0.50-per-share distribution.

Many analysts see propane as a slowly shrinking business. In light of the huge upsurge in domestic natural-gas production, demand among households and businesses to replace their more expensive fuels by adopting natural-gas-fired furnaces and power plants has spurred gas utilities to build out their infrastructure to serve new customers. Greater availability of utility-provided gas mains reduces the need for locally delivered propane, limiting residential demand to those households that are too remote to be connected to distribution networks.

Yet propane companies have been able to boost their profits by taking advantage of the fragmented industry to seek out smart acquisitions. Suburban Propane bought the propane business of Inergy (CEQP), adding to its revenue and pushing up profit expectations dramatically for the next couple of years. AmeriGas also has an active acquisition program that seeks out smaller companies to add to its broader distribution network. Any perception that the industry is in decline only gives giants like Suburban, AmeriGas, and Ferrellgas more leverage to negotiate attractive prices for those local businesses.

The big question going forward is which way Ferrellgas will head strategically. Expansion on its own could help it keep up with the competition. But positioning itself as a target for a major acquisition could be the best move for investors, especially if the company can attract a premium bid.

In the Ferrellgas earnings report, watch closely to get a sense of the company's strategic vision. With the propane business at a crossroads, the direction Ferrellgas picks could have a big impact on its future and the future of the entire propane industry.

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