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While the entire market has seen a pretty solid overall performance year to date, the energy sector has underperformed, with mostly flat performance year to date. Over the past year, the sector has been even more disappointing, having declined by about -23.5% year to date as measured by the S&P 500 Energy Sector SPDR ETF (XLE). As volatility in the market has picked up in the last month, the sector has also picked up negative momentum, dropping a little over -9% in just the last month.
Concern about trade, the future of interest rate policy, and certainly geopolitical tensions in the Middle East are all factors that have worked against the sector for the past month. Add to that a batch of mixed earnings among energy-related companies, including refiners, and I guess it isn’t too surprising to see the sector struggling. HollyFrontier Corporation (HFC) is a mid-cap, independent refining company with operations primarily in the Midwest and Western United States. The company last reported earnings on August 1; while their earnings exceeded analyst’s estimates, the stock has followed the sector trend, dropping by -13% year to date. Most of that decline has come in the last month, as the stock dropped about -8.5% from a near-term peak at around $52 to its current price a little above $44 as of this writing.
That poor performance isn’t too surprising given the direction of the sector, but it also could open up an interesting opportunity with this company, since HFC didn’t just beat estimates for earnings; they also saw earnings grow year over year and refining margins improve in the last quarter while most other refining companies saw weaker refining margins. That could mean the stock’s drop has put it back into the category of a stock that is offering a very interesting value proposition on the back of a very good fundamental profile. Take a look.
Fundamental and Value Profile
HollyFrontier Corporation is an independent petroleum refiner. The Company produces various light products, such as gasoline, diesel fuel, jet fuel, specialty lubricant products, and specialty and modified asphalt. It segments include Refining and Holly Energy Partners, L.P. (HEP). The Refining segment includes the operations of the Company’s El Dorado, Kansas (the El Dorado Refinery); refinery facilities located in Tulsa, Oklahoma (collectively, the Tulsa Refineries); a refinery in Artesia, New Mexico that is operated in conjunction with crude oil distillation and vacuum distillation and other facilities situated 65 miles away in Lovington, New Mexico (collectively, the Navajo Refinery); refinery located in Cheyenne, Wyoming (the Cheyenne Refinery); a refinery in Woods Cross, Utah (the Woods Cross Refinery), and HollyFrontier Asphalt Company (HFC Asphalt). The HEP segment involves all of the operations of HEP. HEP is a limited partnership, which owns and operates logistic assets. HFC has a current market cap of about $7.3 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by more than 50%, while revenues grew by almost 7%. in the last quarter, earnings improved by more than 303% while sales improved by nearly 23%. The company’s margin profile narrowed somewhat in the last quarter, with Net Income as a percentage of Revenues in the last quarter at 4.11% versus 5.25% over the last twelve months.
Free Cash Flow: HFC’s free cash flow is healthy, at $1.5 billion, and marks an improvement from around $1.2 million at the beginning of the year. That translates to a very attractive Free Cash Flow Yield of 20.8%.
Debt to Equity: HFC’s debt to equity is .43, which is generally considered a conservative number. The company’s balance sheet indicates operating profits should be adequate to service their debt, and it also indicates the company’s liquidity is healthy, with more than $914 million in the last quarter versus about $2.78 billion of long-term debt.
Dividend: HFC’s annual divided is $1.32 per share, which translates to a yield of about 2.97% at the stock’s current price.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but one of the simplest methods that I like uses the stock’s Book Value, which for HFC is $39.68 and translates to a Price/Book ratio of 1.11. The stock’s historical average Price/Book ratio is 1.42, which puts the stock’s long-term target price at about $56 per share, which is 27% above its current price. The stock is also trading more than 86% below its historical Price/Cash Flow ratio, and offers up a far more attractive target price near to the stock’s highs from last year at around $82.
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last year of price activity. The red line traces the stock’s downward trend from late last year to its low point in June at around $38; it also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. After rallying from that low around $38 to a near-term high around $52 at the 38.2% retracement line, the stock has dropped back and is currently showing quite a bit of bearish momentum. It appears to have near-term support around $43.50 based on a short consolidation period in May; but if that support doesn’t hold, it could easily drop to retest its June low around $38 per share. Immediate resistance is around $46.50 based on a pivot low in December 2018 around that point; if the stock can break that resistance and drive to $47, it could rally to test its next significant resistance point at the 38.2% retracement line between $52 and $52.50.
Near-term Keys: Given the strength of the stock’s current bearish momentum, I think there is a stronger likelihood the stock could break below support at $43.50. A drop to $43 could be used as an interesting signal to short the stock, with a near-term exit target at around $40, and the next target close to $38. If, however the stock can stabilize and find enough bullish momentum to push to $47, a bullish short-term trader could use that as a signal to buy the stock or work with call options, with a near-term target price at around $52 per share. If you’re not afraid of the potential for continued price volatility in the short term and are willing to be patient in the long-term, the stock does carry a very interesting value proposition right now, with a fundamental profile that is better than most companies in the industry.