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Delek Looks Delightful With 1,000% Earnings Increase Expected

((((picked up 1000shs.))))

Thanks to the record WTI-Brent spread, Delek US Holdings, Inc. (DK – Snapshot Report) is riding high with earnings expected to grow over 1000% in 2011.

This Zacks #1 Rank (strong buy) may face headwinds in 2012 as that spread comes back to earth. Those jitters are reflected in the incredibly low P/E, which is just 4x forward estimates.

Delek US Holdings is an independent refiner with refineries in Tyler, Texas and El Dorado Arkansas producing 140,000 barrels a day. The company also owns 3 terminals in Texas and 7 product pipelines running for about 114 miles between its refined product terminals in Abilene and San Angelo, Texas.

The company also operates 384 retail stores in 7 states under several brands including MAPCO Express, MAPCO Mart, Fast Food and Fuel and Favorite Markets, which sell gasoline and convenience store merchandise.

Special Dividend Announced

With the spread so wide between WTI and Brent, the cash is flowing in and the company is rewarding shareholders.

On November 1, the Board announced that in addition to the regular quarterly cash dividend of $0.0375 per share, it was declaring a cash dividend of 18 cents per share.

Currently, the regular dividend yields 1%.

Delek Surprised for the Fourth Quarter in a Row

On November 2, Delek reported its third quarter results and beat the Zacks Consensus by 4 cents. Earnings per share were $1.64 compared to the consensus of $1.60. The company actually reported a loss of 18 cents per share in the year ago quarter.

It generated record net income during the quarter due to the crude oil differentials that widened in the third quarter. The price of WTI held an average discount of more than $22 per barrel compared to Brent crude during the quarter.

Both refineries operated at near capacity for the quarter to take advantage of the differentials.

On the retail side, same-store merchandise rose 2.4% and same-store food service sales jumped 18.8%, due to the company’s increased concentration of fresh food QSR concepts to about 20% of the store base.

The retail segment did see its contribution margin decline to $15.6 million from $18.7 million last year. Increased credit card expenses resulting from higher fuel prices when compared to the year ago period also impacted the third quarter results.

Zacks Consensus Estimates Still Rising

2 estimates rose for the full year in the last 30 days, pushing up the Zacks Consensus to $3.87 from $3.40 in that time.

That is amazing earnings growth of 1,174% as the company lost 36 cents per share in 2010.

However, analysts see earnings coming back down to earth in 2012. Even though 4 estimates have moved higher in the last month, for 2012, earnings are expected to contract 29% to $2.76.

Valuations Are Cheap Because the Record Spread May Not Last

It’s been an incredible year for the shares, as they soared for the first half of 2011 only to sell off over the summer.

A P/E under 5.0 usually designates extreme value. But in Delek’s case it reflects the realization that the record WTI-Brent spreads may not hold in 2012.

Still, the company has other attractive value indicators.

It has a price-to-book ratio of just 1.3, which is well under the 3.0 cut-off I use for value.

The company also has a price-to-sales ratio of only 0.1. A P/S ratio under 1.0 usually indicates a company is undervalued.

Delek is a value stock with tremendous growth. But how long will it last?