Fear is increasing on a global basis that the outbreak of coronavirus is even worse than most think this week On Tuesday, the Centers for Disease Control (CDC) not only acknowledged that the virus will spread to the United States, but also that Americans should prepare for a “major disruption” as a result. That news added to already heightened fears that the impact will be severe enough to ripple through the global economy on an extended basis, and that in turn is putting a lot of pressure on stocks in practically every single sector.
One of the most dramatically affected sectors in the market in the last week is the Energy sector. In fact, Energy has been one of the only sectors that didn’t follow the broad market’s moves to new highs at the first part of the year. Was that a harbinger of things to come? Maybe; in the last week, the sector is down almost -13%, doubling its decline since the beginning of the year as measured by the S&P 500 Energy Sector SPDR ETF (XLE). That means that most of the stocks in this sector are well off of their highs from 2019, and in many cases are pushing down near to historical lows.
HollyFrontier Corporation (HFC) is a case in point. The stock was already in an extended downward trend from May 2018 to May 2019, but rallied until the end of October to a short-term peak at around $59 per share. From that level, geopolitical pressures began to push the stock back in the direction of the longer trend. That decline has accelerated in 2020, with the stock down about -30% year to date, and nearly -16% in the last week. For most growth investors, that decline is more than enough to make the stock one to avoid; but at the same time, the stock’s drop runs directly counter a generally solid fundamental profile that may also translate to a big value opportunity. The timing might not be right; but let’s run through the numbers, and I think you’ll see this is a stock that is well worth paying attention to.
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 $5.8 billion.
Earnings and Sales Growth: Over the last twelve months, earnings decreased by more than -78%, while revenues increased slightly, by 0.87%. in the last quarter, the decline in earnings was about -71.5% while sales dropped almost -1%. The company’s margin profile is narrow, with signs of deterioration that could signal difficult conditions might continue. In the last quarter, Net Income as a percentage of Revenues was just 1.39% versus 4.41% over the last twelve months.
Free Cash Flow: HFC’s free cash flow is healthy, at $1.25 billion, and marks a modest improvement from around $1.1 million at the beginning of 2019. That translates to a very attractive Free Cash Flow Yield of almost 20.5%.
Debt to Equity: HFC’s debt to equity is .38, a conservative number that has also declined consistently over the last two quarters. The company’s balance sheet indicates operating profits, while narrow, should be adequate to service their debt; the company also has healthy liquidity, with more than $885 million in cash and liquid assets in the last quarter versus about $2.45 billion of long-term debt. It’s worth noting that at the beginning of 2019, HFC reported just $496 million in cash, which makes the latest number all the more impressive.
Dividend: HFC’s annual divided is $1.40 per share, which translates to a yield of about 3.67% at the stock’s current price. The dividend was also increased in the last quarter from $1.32 per share, which I take as another sign of the company’s ability to manage their bottom line and confidence in the future.
Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at almost $54 per share. That means the stock is trading at a major discount, with about 50% upside from the stock’s current price.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The chart above covers the last two years of price activity. The red line traces the stock’s downward trend from June 2018 to its yesterday’s close, when it set a new multiyear low point. It also provides the baseline for the Fibonacci retracement lines shown on the right side of the chart. The stock’s momentum is clearly bearish and accelerating. The stock has broken below its most recent support at $38, which should now act as its most immediate resistance. The stock’s next most likely support level is around $32.50, based on pivots last seen in late 2017. A push above resistance at $38 could see the stock rally in the near term to about $43 before it sees resistance again; but it would need to push above the 38.2% Fibonacci retracement line at $54 to mark a legitimate, likely trend reversal.
Near-term Keys: Given the strength of the stock’s current bearish momentum, the stock’s recent break below support is a pretty interesting short-term signal to consider shorting the stock or working with put options, with an eye on $32.50 as a very near profit target level. If the stock manages to reverse course and push above $38, an aggressive, bullish trader could consider buying the stock or working with call options, with an eye on the next resistance level at around $43 as a bullish profit target. The stock’s value proposition is compelling at its current level, but current market conditions, and the stock accelerating downside risk mean that this is probably not an ideal time to think about buying the stock. Instead, wait for the stock to find its next support level, and show signs of stabilization and consolidation. Once it does, the stock’s long-term prospects are impressive.