3 Points to Take from HollyFrontier’s (HFC) 4Q Earnings Release

3 Points to Take from HollyFrontier’s (HFC) 4Q Earnings Release

HollyFrontier beats revenues and earnings estimates for its fourth quarter but we give three reasons why the company may not see long-term gains


By Micheal Kaufman on Feb 25, 2014 at 2:13 pm EST

HollyFrontier Corporation (HFC) released its fourth quarter (4Q) and full fiscal year 2013 (FY13) earnings today before markets opened. The Dallas-based company reported revenues of $4.827 billion for the quarter, beating Street estimates by 9.6%. Still, revenues were 6.4% over the previous year quarter.

The company reported earnings per share (EPS) of $0.31, beating estimates handily by a 51.2% margin. However, EPS had plummeted 84% year-on-year (YoY) as refinery gross margins contracted 54% to $10.96 per barrel, from $24 in 4QFY12.

The management has announced a special cash dividend of $0.50 per share, along with the regular quarterly dividend of $0.30 per share. This translates into a one-year dividend yield of around 7%, making investing in the stock a solid proposition for dividend investors.

The financial results are positive, and the stock price is up about 1.7% as of 2:00 PM EST. However, we are bearish on HollyFrontier, and recommend that investors keep the following three points in mind.

1. Low Geographic Diversification

HollyFrontier has significant refining exposure to the Mid-Continent region, which has become a profitable refining region in light of the increased supply of domestic and Canadian crudes. However, HollyFrontier has no exposure to the rest of the country, and that means it has very few supply points.

2. Decline in Margins

HollyFrontier is vulnerable to a correction in refining margins, which may occur if the demand for refined products going forward is weaker than expected. Refinery gross margins were $10.96 per barrel in 4QFY13, a decline of 54% YoY. Going forward, the company needs to expand its margins in order to improve its earnings.

HollyFrontier’s President and CEO, Mike Jennings, commented: “Inland refined product margins remained tight during the quarter relative to prior year highs, driving a disappointing year-over-year decrease in fourth quarter earnings.”

3. Poor Stock Performance

Since the start of the year, HollyFrontier’s stock price has dropped almost 3%. Only one of its competitors, Tesoro (TSO), has performed worse – with year-to-date returns of almost -11%. Marathon Petroleum (MPC), another prominent company in the refining and marketing industry, has seen its stock price fall 1.7% since the year began. During the same period, the Energy Sector Select ETF (XLE) has declined by 1%, whereas the S&P 500 ETF (SPY) has been able to rise only 0.24%.

HollyFrontier stock is currently trading at a one-year price-to-earnings multiple of 10.9x, with earnings expected to increase 18% YoY in FY14 to $4.44 per share.

To know more about the company and why we are bearish on it, please read our article HollyFrontier – it’s a Sinking Stock.

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