Analyst Justified in Second Downgrade for Alon Energy

Lehman Brothers analyst Paul Cheng (who is, incidentally, an excellent energy analyst who predicted the situation I describe below long before most other analysts in the field did), has downgraded his rating for Alon USA Energy Inc. (NYSE:ALJ), and cut his target price. To be honest, I have no problem with this and I believe that Cheng is 100% right to downgrade his rating for Alon USA a second time. Alon USA climbed more than 121% during the period March-August, an achievement due in its entirety to everyone’s belief that oil was heading for $100 a barrel.

Opening his review which was appeared yesterday, Cheng states, “We are updating our assessment to reflect the bearish forecast for the demand-supply ratio, which is partially offset against a stronger sales forecast, indicating larger profit margins.” What is Cheng actually saying, with such eloquent verbal artistry? He is saying that he would have cut his rating for Alon USA even more were it since the supplies of oil for sale far exceed the rate of purchases, but Alon USA is an excellent company whose profits are influenced largely by the end link in the oil track - the consumer. By the time it reaches that stage, the price per barrel is important but not as important as the marketing operation, products and pricing skills.

Put simply, Cheng still doesn’t know how the fall in oil prices (something he is sure will happen) will affect the various stages in the marketing chain, and companies such as Dor Alon, which make most of their profit from conventional retailing activity. Incidentally whatever Cheng says about Alon USA also applies to Delek US Holdings Inc. (NYSE:DK), albeit with a slight difference. Delek US did not have the pleasure, fortune, or misfortune to rise as Alon USA did, so the blow it suffered must have been less harsh than that experienced by Alon USA.

However, one thing should be made clear: Alon USA (and apparently, also Delek US about which I know less), is a company that has been managed outstandingly. Alon USA, as it happens, is currently 39% above its price at the beginning of the year. My advice to those who do not have Alon US or Delek US in their portfolios is to wait and see how things develop. There’s no need to rush. If oil prices continue to fall, (and I quite definitely believe that they will), stocks like Alon USA and Delek US will also be hurt, even if there is no financial reason for this.

Comment on this article

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.

Comments

[Walter Kass:]

I speak Hebrew but something is lost in the translation here. I am a retired Analyst, PM and Investment Banker. He tries to re-package Paul Cheng's report unsuccessfully. The report waffles, which is unusual for Mr. Cheng. Bottom line, if ALJ was priced for $100 oil then why didn't Cheng put out a sell in August when the crack spread peaked? Any guesses? I don't think t ALJ management made a SINGLE mention of $100 oil oil when they bought Paramount and Edgington with CASH from their CREDIT line, not supposedly overpriced shares. Someone explain this logic disconnect to me please? And where is the crack spread and where is it going?

In English please?

2006 Oct 06 07:56 AM