Delek US Holdings (DK): A Modestly Undervalued Gem in the Energy Sector
Delek US Holdings Inc (NYSE:DK), a leading integrated energy business, has recently caught the attention of value investors. Despite a daily loss of 3.81% and a per-share loss of $0.81, the company has seen a 3-month gain of 20.8%. The question arises: is Delek US Holdings (NYSE:DK) modestly undervalued? This article aims to delve into this question by conducting a detailed valuation analysis. So, let's explore.
Company Overview
Delek US Holdings Inc is an integrated energy business focused on petroleum refining, transportation, and storage; wholesale crude oil, intermediate, and refined products, and convenience store retailing. The company owns and operates independent refineries that produce a variety of petroleum products for transportation and industrial markets in the United States. Delek's logistics segment sells portions of the petroleum products its refineries produce. The logistics segment generates revenue through gathering, transporting, and storing crude oil and intermediate products, as well as by marketing, storing, and distributing refined products. The company also offers a collection of retail fuel and convenience stores operating in the Southeast region of the United States.
With a market cap of $1.80 billion and sales of $17.90 billion, the stock price of Delek US Holdings stands at $28.52, while the fair value (GF Value) is $34.57. This discrepancy suggests that the stock may be modestly undervalued.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is calculated based on historical multiples, a GuruFocus adjustment factor, and future business performance estimates. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus Value calculation, the stock of Delek US Holdings (NYSE:DK) appears to be modestly undervalued. This suggests that the long-term return of its stock is likely to be higher than its business growth.
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Financial Strength
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Delek US Holdings has a cash-to-debt ratio of 0.28, which is worse than 62.67% of 1034 companies in the Oil & Gas industry. GuruFocus ranks the overall financial strength of Delek US Holdings at 5 out of 10, which indicates that the financial strength of Delek US Holdings is fair.
Profitability and Growth
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. Delek US Holdings has been profitable 7 years over the past 10 years. During the past 12 months, the company had revenues of $17.90 Bil and Loss Per Share of $0.81. Its operating margin of 0.62% worse than 72.97% of 984 companies in the Oil & Gas industry. Overall, GuruFocus ranks Delek US Holdings's profitability as fair.
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Delek US Holdings is 32.6%, which ranks better than 85.15% of 862 companies in the Oil & Gas industry. The 3-year average EBITDA growth rate is 7.2%, which ranks worse than 60% of 830 companies in the Oil & Gas industry.
ROIC vs WACC
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Delek US Holdings's return on invested capital is 0.93, and its cost of capital is 7.18.
Conclusion
In conclusion, the stock of Delek US Holdings (NYSE:DK) appears to be modestly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks worse than 60% of 830 companies in the Oil & Gas industry. To learn more about Delek US Holdings stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
