Alon USA Energy: It's All About the Management

Apr.12.07 | About: Alon USA (ALJ)
Alon USA Energy Inc. (NYSE:ALJ) is an example that proves that a company can be highly successful even when operating in a very crowded and competitive market, and in a niche that was filled long before it ever existed.

As in other similar cases, Alon USA's success is due entirely to its management. After falling from last September's high of $42, the company's stock is once again touching the $40 mark, and it appears to be on track to break its previous record. After everyone downgraded their ratings for Alon USA at the end of last year, three analysts have now upgraded their ratings to "Buy." Only yesterday, I received two reviews, one by the Bank of Montreal, which rates Alon USA "Buy, and the other by Lehman Brothers, which for some reason rates the company "Underweight 3" and has set a target price of $34, lower than its current market price.

The earnings per share estimates for 2007 of the seven analysts currently covering the stock range from $3.20 to $4.01, with the consensus standing at $3.60. If we opt for the lower estimate, then Alon is currently trading at a multiple of 12.3 for 2007. A multiple like this is very low if Alon continues at the rate it has done for the last five years, and very high if the sales and profit are likely to fall in 2008, as the analysts fear. They believe that earnings per share will fall to a consensus level of $3.09 in 2008 and that this will have a negative impact on investors. The analysts' sales forecasts range from $3.06 billion to $5.40 billion.

The facts on the ground are that since the beginning of the year, the stock has gained more than 56% and it is now, as mentioned earlier, reaching an all-time high. In other words, investors are optimistic. Why? Principally because there is a considerable discrepancy between what analysts say and what happens on Main Street, and institutional investors can see this. The effect of the price of a barrel of crude oil may be very important on Wall Street, but where Alon USA is concerned its importance is not all that high.

What are Alon USA's sources of income? The company engages in oil refining, and it operates six large terminals, five of them in Texas and one in Oklahoma. It has almost 1,400 gas stations, alongside which it also operates a 160-store chain of the famous 7/11 convenience stores, and is the largest franchisee in the South West of North America. In addition, it is the leading producer of asphalt in the South West of the U.S. The asphalt is produced at its asphalt refining plant in California.

While oil prices serve as an important basis for calculating the company's profit margins in all its energy businesses, it should be understood that this cost is more or less equal for all the companies that engage in the refining, transport, storage and sale of petroleum products. The profitability of companies like Alon USA is not measured in terms of crude oil prices, but by their ability to improve their efficiency on the one hand, while providing proper service on the other.

As mentioned earlier, Alon USA is in a very crowded and competitive market and the fact that it has been so successful proves one important thing: this is classic case of successful management. The ability of Alon USA's management to implement so complex a strategy so efficiently (its business results since 2001 speak for themselves) is the key weapon.

Finally, there is the company's asphalt business, and here too it has demonstrated its sound strategic vision. Alon is the leading producer of asphalt in California and Oklahoma, and the second largest producer in Texas. I think that the asphalt is the factor that is driving the stock back up to its high.

So is it worthwhile buying Alon USA at the current price, $40? How can I say yes when a distinguished investment house like Lehman Brothers has set a twelve-month target price of $34? One thing I can say: I'm not selling.

ALJ 1-yr chart

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

© Copyright of Globes Publisher Itonut (1983) Ltd. 2007