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Why Is Delek US Holdings (DK) Down 3.5% Since Last Earnings Report?

Zacks Equity Research

A month has gone by since the last earnings report for Delek US Holdings (DK). Shares have lost about 3.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Delek US Holdings due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Delek Q4 Earnings Beat on Midland Discount

Delek US Holdings reported fourth-quarter adjusted net income per share of $1.59, ahead of the Zacks Consensus Estimate of $1.28 and the comparable 2017 period profit of 58 cents on robust Refining segment results.

With 70% of the downstream operator’s refining capacity leveraged to lower Permian pricing, the company benefited from favorable crude differentials, which averaged $10.68 per barrel in the fourth quarter.

However, Delek US Holding’s net sales of $2.4 billion came below the Zacks Consensus Estimate of $3 billion on lower crack spreads. Revenues decreased 2.8% year over year.

The company reported expenses of $137.8 million during the quarter, up from the $127.8 million incurred in the year-ago period.

Delek also announced a 3.8% increase in its quarterly dividend to 27 cents from 26 cents. The company bought back about $365 million of stock in 2018 and expects to repurchase $50 million of its common stock in the first quarter.

Segmental Performance

Refining: Margin from the Refining segment was $235.3 million compared with $185.8 million in the year-ago quarter. The improvement reflects wider Midland discount versus Cushing (on continued congestion in the Permian Basin) and lower RIN costs, partly offset by narrowing crack spreads.

Logistics: This unit includes Delek US Holding’s 63% interest in Delek Logistics Partners, L.P., a publicly-traded master limited partnership that owns, operates, develops and acquires pipelines and other midstream assets. Margin from the Logistics unit totaled $45 million, up 37.6% from the year-ago period. The segment results were impacted by contribution from the drop down of the Big Spring refinery logistics properties. This was partly offset by decrease in gross margin per barrel in west Texas.
 
Retail: Margin for the unit – which came into being following the acquisition of Alon USA Energy in 2017 – edged down 1.5% to $13.1 million due to lower merchandise sales and margins. Delek’s merchandise sales came in at $81 million with an average margin of 30.2%, compared with $84.2 million with an average margin of 31.5% in the year-ago period. These factors were partly offset by the higher retail fuel margins. Delek sold retail fuels at an average margin of 30 cents per gallon, compared with 17 cents per gallon in the year-ago period

Capital Expenditure, Balance Sheet & Share Repurchase

In the reported quarter, Delek spent $106.3 million on capital programs (64% on the Refining segment). As of Dec 31, 2018, the company had cash and cash equivalents of $1.1 billion and long-term debt of $1.8 billion, with a debt-to-capitalization ratio of 48.9%. During the quarter under review, Delek returned $179 million of capital to shareholders, including $157.9 million of share repurchases.
 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -29.6% due to these changes.

VGM Scores

Currently, Delek US Holdings has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Delek US Holdings has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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