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Delek The Dud

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January 06, 2010 – Comments (6) | RELATED TICKERS: DK

We noticed on the Wiki Invest site, there seemed to be a lot of activity surrounding oil and gas refiner Delek US Holdings, Inc. (NYSE: DK). Curious, we decided to take a little looksee.

Basis
Financial information contained in this report, is based on the company's most recent Form 10-K filing for fiscal year ending December 31, 2008, as filed with the Securities and Exchange Commission on March 9, 2009.

What They Do
Delek US Holdings is a diversified downstream energy company with operations in three primary business segments: petroleum refining, marketing and supply, and retail convenience stores. The company completed its sixth consecutive year of profitability in 2008, on revenues of more than $4.5 billion.

Headquartered in Brentwood, Tennessee, the company currently employs more than 3,500 people across eight states, and has been publicly traded on the New York Stock Exchange since 2006.

The Refining segment operates a 60,000 barrel-per-day high-conversion, moderate complexity refinery in Tyler, Texas.

The Marketing and Supply segment transports and sells refined products on a wholesale basis in west Texas through company-owned and third-party operated terminals.

The Retail segment markets gasoline, diesel and other refined products through a network of 440 company-operated fuel and convenience stores located in eight states under a number of regional brands, including MAPCO Express®, MAPCO Mart® East Coast®, Discount Food Mart™, Fast Food and Fuel™ and Favorite Markets®.

The company's convenience store operations were recently ranked among the 20 largest company-operated convenience store chains in the United States.

In addition, the company has a minority (34.6%) interest in Lion Oil Company, a privately-held, 75,000 barrel-per-day refinery in El Dorado, Arkansas.

The company's philosophy has been to merge the acquisition expertise of a private equity firm with the management and operational expertise of energy industry veterans. The result is a company that is an active acquirer of downstream energy assets.

The company's growth is a result of the ability of management to consistently enhance the efficiency and profitability of purchased assets. Since 2001 the company has completed 11 acquisitions in the refining, marketing/logistics and convenience store industries.

Short-Term Investment
According to its MACD trend line the stock has recently begun an upward trend.

With a recent close of $7.31, and first resistance at $8.41, an approximate 15% upward delta as compared to first support at $6.74, an 8% downward delta, we believe the stock is setting up for a short-term trade.

Long-Term (5 Year Hold) Investment
The company touts it's ability to merge acquisitions into a cohesive, well oiled (pun intended) money making machine. Please excuse us if we call BS at this point. While the company may indeed make lots of money for it's private equity firm owners, in our opinion, a viable long-term investment for the average working person, it is not.

None of the company's basic financial ratios, the current ratio, the quick ratio, or the cash ratio are even close to the levels we require to consider a company a viable investment candidate. The company also only managed to generate $0.51 in free cash flow, an amount well below what we consider investment quality.

The company's available cash at $0.28 per share is an an issue for us, as is the company's debt at $5.25+ per share. We did check, and found that for the first nine months of fiscal 2009, the company has increased net debt by just less than $90 million.

Yes we realize the company is in the "oil bidness" and that debt is part of that business. But our thoughts are these. The company has $0.28 cash on hand, and pays out $0.44 per share in interest payments on debt of $5.25 per share. Because we checked, we know that for fiscal 2009 the company has already increased debt by about $1.65 per share. We also know that the company's average interest rate for fiscal 2008 was 8.29%.

So our concern, simple minded as it may seem, is what happens when the Fed starts to increase interest rates, or in year or so inflation becomes an issue? All of a sudden the company's cost of sales at 91+% is an issue and that $0.28 of available cash looks like a flea on a the deck of an aircraft carrier.

Instead of an investment in this stock, we suggest a relaxing afternoon watching Gilligan's Island reruns, an acitivity we think would be much more rewarding than in an investment in Delek US Holdings.

Wax

For the Delek US Holdings Raw Value worksheet, please click here.

6 Comments – Post Your Own

#1) On January 06, 2010 at 8:05 AM, JakilaTheHun (99.93) wrote:

Where do you come up with $0.28 per share cash on hand? 

I'm looking at the 3rd Quarter 10-Q and I see $108 million cash + equivalents and 53.7 million shares, which would equal just over $2 cash on hand per share --- not 28 cents.  Likewise, LTD-to-Equity ratio is 0.5. 

The low cash flows in relation to their stock price, however, is more worrying.  But it is worth noting that refining is a cylical business. 

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#2) On January 06, 2010 at 9:55 AM, chk999 (99.97) wrote:

Nice writeup Wax! You write some of the best DD that gets blogged in CAPS.

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#3) On January 06, 2010 at 8:40 PM, wax (97.34) wrote:

Jakila;

Please take a minute and go read the Basis section of the post again. You should find your answer there.

Wax

 

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#4) On January 06, 2010 at 8:44 PM, wax (97.34) wrote:

Chris;

Thank you for your kind words.

Wax

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#5) On January 07, 2010 at 2:10 AM, JakilaTheHun (99.93) wrote:

Wax,

Alright, but that's rather outdated information to rely on, is it not?  

It's not so much that I disagree with your conclusion.  I have mixed views on DK.  I will note that there is rather high inside buying, so the people running the company don't seem to agree. 

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#6) On January 07, 2010 at 5:16 AM, wax (97.34) wrote:

Jakila;

I am a value investor. I take the time to look at many different parts of a company with the idea being I intend to own the stock for at least 5 years, but perhaps for 10, or 15, or 20 years.

In order to consider a company, I need help, a little of which I get from the independent auditors that issue a company's annual statement.

It's the one that all of the company's director's sign in blood and then go..."lie? who us...lie? No way, not us, no sir!" That one.

And so yes, the information is a bit outdated, but unlike the data you seem to rely on, the odds that it will change, are very small.

In the end, I have looked at public companies with private equity firm arrangements like DK has, and I have yet to find one where the long-term investor, other than the private equity firm, ever made a reasonable return on their invested dollars.

Wax

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