By On Tuesday, JPMorgan analysts upgraded Delek US Holdings (NYSE: DK) stock from Underweight to Neutral, increasing the price target to $26 from $23, suggesting a potential upside of 36% from its current price.
This upgrade reflects cautious optimism, acknowledging improvements in Delek’s operational and cost structure, particularly in its refining operations.
This rating change comes on the heels of Delek’s strategic divestment of its retail business to FEMSA for $385 million, a move aimed at streamlining operations and improving transparency for investors.
The divestment, which includes 249 convenience stores primarily located at gas stations, aligns with Delek’s ongoing efforts to enhance its focus on core refining and logistics operations.
This sale is expected to generate substantial cash inflow, which Delek plans to use to strengthen its balance sheet and fund shareholder returns, including the recently announced $400 million increase in its share repurchase authorization.
Delek US Holdings Q2 report
In its Q2 2024 earnings report, Delek posted a Non-GAAP EPS of -$0.92, beating estimates by $0.41, and revenue of $3.42 billion, exceeding expectations by $110 million.
Despite these beats, the company recorded a net loss of $37.2 million, reflecting the ongoing pressures from lower refining margins and higher operational costs.
Delek’s refining segment saw a significant decline in Adjusted EBITDA to $42.1 million, down from $212.4 million in the same quarter last year, primarily due to a 21.1% drop in benchmark crack spreads.
The logistics segment, however, showed resilience, with Adjusted EBITDA increasing to $100.6 million, driven by strong performance from the Delaware Gathering systems.
DK’s financial strain
Fundamentally, Delek is navigating a challenging environment characterized by volatile crude oil prices and tightening refining margins.
The company’s high debt levels, with a net debt of $1.8 billion as of June 30, 2024, coupled with liquidity constraints, pose significant risks.
Delek’s enterprise value of $3.38 billion, largely influenced by its debt burden, underscores the financial strain the company faces.
While the recent retail divestment and share repurchase program indicate management’s commitment to improving shareholder value, the overall financial health of the company remains precarious.
Delek is also contending with headwinds such as rising operational costs and market volatility, particularly in the refining segment, where margins are under pressure.
The company’s efforts to reduce costs and enhance operational efficiency through its Phase 2 cost-reduction program are ongoing, but the full impact of these initiatives remains uncertain.
Delek US Holdings valuation
Valuation-wise, Delek is in a challenging position. The company’s negative P/E ratio and EPS yield indicate that it is not currently profitable, which is concerning for investors looking for growth.
The dividend yield of 5.23% might attract income-focused investors, but the sustainability of this dividend is questionable given Delek’s financial struggles.
The company’s high debt levels further exacerbate its valuation challenges, making it difficult to justify a bullish outlook despite recent operational improvements.
Given this backdrop, the next step is to analyze the stock’s price trajectory through technical indicators to determine if these fundamental challenges are reflected in the market sentiment and to assess the potential for a recovery.
Delek US Holdings stock technical analysis
Delek’s stock peaked above $60 in June 2018, entered a downtrend immediately and crashed below $10 in March 2020. Since mid-2022 the stock has traded in a range of $19.5-$35.
Source: TradingView
Earlier this year in April the stock was trading near the higher end of this range, but the downtrend since then brought it to the lower end of the range and it has broken below it in the last few days.
Currently, Delek’s stock is appearing weak across timeframes.
Moreover, breaking below its long-term range doesn’t bode well for the stock in the near term.
Therefore, investors who are bullish on the stock must refrain from initiating fresh long positions at current levels.
Short-term traders bearish on the stock, on the other hand, can initiate short positions near $19.50 with a stop loss at the recent swing high at $24.7.
If the downward momentum persists, Derek’s stock can fall to 414 levels, where it last took support in late 2021.
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