World Fuel Services (
INT) is a provider of, you guessed it, fuel and
related services to the marine, aviation, and land vehicle market,
which is how the company is segmented. The marine segment (55% of
sales, 51% of profits) and aviation (33%, 40%) provide similar services
at seaports and airports. International container and tanker fleets in
marine, and airlines and cargo carriers in aviation both contract with
World Fuel to provide the convenience of a single source supplier,
procurement outsourcing, quality control, price hedging, logistics,
offering credit, and providing ancillary services like flight plans and
weather reports. In general, you can think of INT as a fuel reseller
and broker, earning the lion's share of profits on the spread between
fuel acquisition costs and resale pricing, as well as about 20% on
other services. The land segment (12%, 9%) is similar. This division
mainly serves as a wholesale gasoline and diesel provider to service
stations both in the U.S. and overseas. A handful of service stations
are directly operated by the company.
Growth will come mainly through acquisition and market share gains.
The company has been aggressively expanding its land business,
acquiring TGS (a wholesaler in the mid-west) and U.K.-based Henty Oil
this past April. Both are expected to add to profits this year. A
discussion of growth prospects here also dove-tails into a discussion
of competitive position. World Fuel faces a lot of competitors, from
small regional outfits to direct selling efforts by the oil majors like
ExxonMobil (XOM). But in this market, World Fuel is one of the largest
players. They benefit from a strong balance sheet and good credit
controls, the opposite of which are hurting smaller competitors. This
should allow the company to continue to take market share and
consolidate, providing solid growth and improved competitive position.
Financial health is good. The company's balance sheet has $366
million of cash and only $20 million of total debt. Free cash flow has
been spotty in the past, with 3 of the last 5 years coming in cash
negative. But 2008 and so far in 2009, free cash flow generation has
been outstanding. Return on capital, too, has been solid, averaging
about 21% (41% using the MFI formula) over a 5 year period, and coming
in near 35% (124%) over the past few years. It is important to realize
that this is a low margin business. World Fuel generally only generates
a 2-3% gross margin on fuel resale. The most important factor to
profitability is the company's ability to build inventory at low prices
and then benefit from run-ups in fuel sale prices. This perfectly
describes the situation for the past 6 months or so after prices
plummeted in early 2009. That fact has allowed gross margins to climb
to the 3.5-4.5% range over the past 2 quarters, a big boon to profits.
Over the long term, gross margin is likely to decline back down to
around 2%.
So, what are the risks? The first one was described earlier -
volatility of fuel prices can be a boon (when they rise quickly) or a
drag (when they fall quickly) to gross margin. Sales volume is
dependent on the highly cyclical airline and shipping industries. Gas
prices are also quite volatile and can lead to massive fluctuations in
revenue levels, although World Fuel's profitability is more tied to
gross margin than to revenues. Lastly, since growth is dependent on
acquisition, the company faces the risk of overpaying.
Overall, however, I believe World Fuel is a decent MFI play. The
flexibility of the cost structure allows the company to maintain
profitability even in down periods, and its size and financial strength
should allow continued consolidation of a massive market. The stock
price has had a huge run-up, from the high teens last year at this time
to the mid-50's today. At a 13.4% earnings yield, it still looks cheap,
although the return of gross margin to the norm will hurt
profitability. A bit too unpredictable to be a Top Buy, but a positive outlook nonetheless.
Steve owns no position in any stocks discussed in this article.
