Delek US Holdings Inc (DK, Financial) recently marked a daily gain of 3.23% and a three-month gain of 31.54%, despite reporting a Loss Per Share of 0.81. Is the stock modestly undervalued? This article aims to answer this question by providing a detailed valuation analysis. Read on to explore the intrinsic value of Delek US Holdings (DK).
Company Overview
Delek US Holdings Inc is a diversified energy business with a focus on petroleum refining, transportation, and storage; wholesale crude oil, intermediate, and refined products, and convenience store retailing. With independent refineries that produce a variety of petroleum products for transportation and industrial markets in the United States, Delek US Holdings has carved a niche for itself in the energy sector.
Trading at $30.72 per share as of September 18, 2023, Delek US Holdings has a market capitalization of $2 billion. However, the GF Value, a proprietary measure of the stock's intrinsic value, is estimated at $34.69, indicating that the stock might be modestly undervalued.
Understanding the GF Value
The GF Value represents the intrinsic value of a stock, derived from a unique methodology. This methodology takes into account historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page provides a visual representation of the stock's fair trading value.
Delek US Holdings (DK, Financial) appears to be modestly undervalued based on the GF Value calculation. If the price of a stock 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. Given that Delek US Holdings is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth.
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Examining Financial Strength
Investing in companies with poor financial strength can lead to a higher risk of permanent loss of capital. Therefore, it's crucial to carefully review a company's financial strength before deciding to buy its stock. A good starting point is to look at the cash-to-debt ratio and interest coverage. Delek US Holdings has a cash-to-debt ratio of 0.28, which is worse than 62.51% of 1027 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 billion and a Loss Per Share of $0.81. Its operating margin of 0.62% is worse than 73.26% of 976 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 performance of a company's stock. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Delek US Holdings is 32.6%, which ranks better than 85.18% of 857 companies in the Oil & Gas industry. The 3-year average EBITDA growth rate is 7.2%, which ranks worse than 59.88% of 825 companies in the Oil & Gas industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted 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. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Delek US Holdings's return on invested capital is 0.93, and its cost of capital is 7.08.
Conclusion
In conclusion, the stock of Delek US Holdings gives every indication of being modestly undervalued. The company's financial condition is fair, and its profitability is fair. Its growth ranks worse than 59.88% of 825 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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