Delek and Alon: Tale of Two Energy Stock IPOs

A lesson in how investors work can be learned by comparing two US-Israeli energy companies: Delek US Holdings Inc. (NYSE: DK) and Alon USA Energy Inc. (NYSE: ALJ).

Delek US was floated on the New York Stock Exchange in early May at $16 per share. The company raised $175 million (including a green shoe option for the sale of 15% in addition to the amount of the offering, if the share began with a rise). The offering, led by Citigroup and Lehman Brothers, was quite tepid, and a month later, the share was down 25% to $12. Ten weeks later, the share is almost back to its IPO price.

Delek US was the second Israeli energy company to go public in the US. It is basically the US arm of Tel Aviv-traded Delek Group Ltd, the conglomerate headed by one of Israel’s more serious businessmen, Yitzhak Tshuva.

The other energy company, which closely resembles Delek US, is Alon USA, controlled by another of Israel’s more successful businessmen, David Wiessman. Alon USA was floated in late July 2005 at $16 per share, the same price as Delek US, and raised $175 million, also the amount as Delek US. The underwriters were Credit Suisse, Deutsche Bank and Lehman Brothers. Since its IPO, Alon USA has risen 108% to $33.50.

Both companies issued 11.7 million shares to the public, amounting to 20% of Delek US and 23% of Alon USA. Both companies show about the same business performance. Alon USA has $2.5 billion in sales a year, a profit before taxes and finance expenses of $200 million, and a net profit of $137 million. The company has $255 million in cash, a fairly small debt of $39 million, and a market cap of $1.56 billion.

Delek US also has $2.5 billion in sales, a profit before taxes and finance expenses of $161 million, and a net profit of $76 million. The company has $78 million in cash, a debt of $268 million, and a market cap of $778 million.

So why is Alon USA worth double Delek US? True, it appears to be somewhat more efficient, a little more profitable, and has almost no debt, relatively speaking, but double the value? This looks rather overblown, does it not?

In my opinion, and without implying anything about Delek US’s management, which seems to me to be excellent, investors apparently greatly prefer the management of Alon USA. I have the impression that a lot of the investors who set the terms are Americans, because Israelis definitely see Tshuva and Weissman as equals.

Someone told me that the difference in the values between the two companies is because Alon USA makes and sells asphalt, and Delek US does not. Asphalt, it turns out is a raw material in great demand worldwide. But this cannot be the difference between the two companies on Wall Street.

Such differences are due to feelings of Wall Street opinion-makers about this or that company. Don’t ask why, but Alon USA is included in the list of growth companies, and Delek US is in the list of energy companies, and this is the reason for the difference in their market caps.

In May, Robert Aronen, a contributor for Fool.com, wrote two enthusiastic articles about Alon USA. When such a writer for such a website writes that Alon USA Energy is beginning to stand out as a growth story that is worth watching in the refining and marketing sector in the oil patch on Wall Street, there are a lot of people who are persuaded to buy the share and pay the premium.

As for Delek US, five of the six analysts covering the company give it a “Buy” recommendation, including two who rate it a “Strong buy”. In contrast, no analyst recommends buying Alon USA at the moment, yet ever since Delek US’s IPO, and despite the recommendations, Alon USA has outperformed Delek USA by far.

This leads me to conclude that the reason for the gap is that analysts look at Alon USA as a growth company in the energy sector, but look at Delek US as merely an energy company. By the way, the p/e ratios in the energy sector are 8-10 for 2006, which proves that Alon USA is not perceived as merely an energy company.

The question is whether it is worthwhile in the short and medium term to sell Alon USA short and buy Delek US with the proceeds (technically, this is impossible, and money is needed for both transactions). No, no way. Why not? Because on Wall Street, because it's Wall Street, one should never compare stocks, because each stock has its own life and its own image.

What could happen in practice is that Alon USA could continue to climb, while Delek US stays flat. Just don’t ask me why.

DK and ALJ, 1 year chart:

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.