Delek US Holdings Inc. (DK) has been on a roll since the beginning of 2012, jumping more than 45% year-to-date. Shares of this diversified downstream energy operator have benefited from four consecutive earnings surprises and a compelling valuation. The company became a Zacks #1 Rank (Strong Buy) stock on May 19, following EPS growth of 155% in the first quarter.
Delek reported earnings per share of 79 cents on May 3, beating the Zacks Consensus Estimate by 30% and improving significantly upon last year’s 31 cents. Healthy contribution from the refining segment on the back of regional demand and favorable economics increased the top line and led to the solid year-over-year growth.
In the retail segment, same-store merchandise sales rose 7.6% compared to a year ago. It was sparked by food service sales, which jumped 24% as Delek focused on increasing the fresh food ‘QSR’ (Quick Service Restaurants) concept in more stores. Continued strength in distillate demand in the core Texas region also drove the quarter’s results.
Special Dividend Payout
Delek is generating decent amounts of cash and managed to book over $130 million in cash flow from operations in 2011, which is being returned to investors in the form of a special dividend. On March 26, the company declared its second special cash dividend – of 9 cents per share – in the last 6 months. This is over and above the regular dividend, currently yielding 0.9%.
Zacks Consensus Estimates Move Higher
Based on strong fundamentals and a healthy profitability outlook across all operating segments, three estimates moved higher for 2012 in the last 30 days. The Zacks Consensus Estimate advanced by 25.4% to $3.01. This implies an earnings improvement of 7% from 2011, which in itself was a strong year due to the high crack spreads – the conventional measure of refining profitability.
A Deep Value Play
The valuation picture looks compelling with a forward P/E of 5.60x, a 2% discount to the peer group average of 5.71x. Also, on a price-to-book basis, shares currently trade at 1.40x, a 6% discount to the peer group average of 1.49x. With crude crack spreads set to widen in the coming months, we believe Delek shares will continue to close the valuation gap to the group. Additionally, the company has a trailing 12-month return on equity (ROE) of 28.1%, well above the peer group average of 20.7%. This implies that the company reinvests its earnings more efficiently than its peer group.
Chart Shows Strength
The chart shows Delek in an upward channel since the beginning of 2012, once the fear about declining spreads passed. Since mid-January, the stock has also maintained momentum above its 50 day moving average, which currently stands at $15.41 against the current stock price of $16.85. On the performance front, Delek’s share price has handily outperformed the S&P 500 year-to-date and has delivered a healthy return of 47.7% during the period versus just 4.9% for the benchmark.
Company Description
Franklin, Tennessee-based Delek US Holdings is an independent refiner, wholesaler and marketer of petroleum products. The company’s refining operations include two units – in Tyler, Texas and El Dorado, Arkansas – having a combined crude processing capacity of 140,000 barrels per day. Delek’s ‘Marketing and Supply’ segment sells refined products in the Gulf Coast and Mid-Continent regions through a series of company-owned and third-party terminals and pipeline assets. Finally, the company’s ‘Retail’ business consists of a network of 377 stores spread across 7 states that market gasoline and convenience store merchandise under several brands including MAPCO Express, MAPCO Mart, East Coast, Fast Food and Fuel, Delta Express, Discount Food Mart and Favorite Markets.
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