Delek US Holdings, Inc. (DK): A Bull Case Theory

We came across a bullish thesis on Delek US Holdings, Inc. (DK) on Substack by Matt Lindsay. In this article, we will summarize the bulls’ thesis on DK. Delek US Holdings, Inc. (DK)’s share was trading at $17.91 as of 21^st May. DK’s trailing and forward P/E were 4.61 and 20.33 respectively according to Yahoo Finance.

Delek (DK) operates in the challenged refining sector, where cyclical margins, high capital intensity, and commodity exposure dominate. Crack spreads are down 43% YTD, but at $12 per share, Delek’s valuation is simply too cheap to ignore. Notably, the company owns 34.1M shares of Delek Logistics (DKL), worth $22 per DK share alone.

While concerns persist over DKL’s low float and dependence on MLP fund inflows, its valuation is supported by peer multiples and an 11% distribution yield. Backing out non-recourse debt, DK’s net debt is a modest $159M. With four Gulf Coast refineries and conservative estimates, DK’s mid-cycle valuation is pegged at $25/share for refining plus $22/share from DKL, implying a $47 SOTP value.

DKL distributions alone cover DK’s dividend and interest. Despite being a high-cost refiner, Delek is cutting expenses and DKL now generates increasing third-party revenue. Management has slowly moved toward unlocking the SOTP value since a new leadership team took over in 2022. Steps include dropping down the Wink to Webster pipeline, divesting its retail segment for $385M, and multiple secondary offerings at DKL to improve float and reduce DK’s stake from 79% to 64%. Recent acquisitions have further diversified DKL’s revenue.

Although the market remains skeptical—due to management’s prior overpromises and DK’s short interest—actual progress is tangible. DK has reduced G&A and OpEx to $9.60/bbl, paid down $400M in debt, returned $252M to shareholders through dividends and buybacks, and continues to execute on cost reduction. Trading at a 75% discount to fair value and offering an 8.5% yield, DK presents a compelling opportunity.

Delek US Holdings, Inc. (DK) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 23 hedge fund portfolios held DK at the end of the fourth quarter which was 23 in the previous quarter. While we acknowledge the risk and potential of DK as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.