For the average person, filling the fuel tank for your mode of transportation – whether it’s a car, truck, SUV or motorcycle – is a relatively straightforward task. You pull up to a gas station, swipe a card, pump the gas and you’re on your way in less than 5 minutes. Yet if you have a larger means of transportation, say a plane or a barge, fueling up isn’t quite that simple. That is, if you have a vessel instead of an average vehicle, then your fueling needs are likely to be a touch more complicated.
World Fuel Services (INT) is in the business of providing a solution for this precise predicament. Headquartered in Miami, FL, World Fuel Services is “a global leader in the downstream marketing and financing of aviation, marine and land fuel products and related services.” With sales of nearly $39 billion in 2012, World Fuel Services provides solutions in over 8.000 locations worldwide.
Specifically, the aviation segment – which contributes about two-fifths of the company’s profit – has about 3,000 locations. The marine segment provides about a third of the profits by selling fuel, lubricants, consulting and yacht services at more than 1,100 seaports globally. Finally, a fourth of the business comes from the land segment, providing more than 3 billion gallons of fuel product annually in Brazil, the United Kingdom and the United States. In addition, just about half of its profits come from the Americas. It’s not much of a wonder why World Fuel Services likes to be known for “Fueling Relationships Around the World.”
With such a global footprint, one might be inclined to believe that World Fuel Services controls a great portion of the world fuel distribution market – certainly their name doesn’t shy away from this distinction. However, that’s not necessarily what we see. For instance, in the aviation market World Fuel Services supplies about 4.4 billion gallons of fuel a year to companies like Virgin America, Delta (DAL), FedEx (FDX), JetBlue (JBLU), Korean Air and Lufthansa (DLAKY). Yet World Fuel Services only has about 6% of the global aviation market share. On the marine side, the company sold 26 million metric tons of fuel last year to companies like Royal Caribbean (RCL), Hanjin Shipping and Evergreen Marine Group – however World Fuel Services only makes up about 12% of the global marine market. Finally, World Fuel Services provides services on land to customers like Speedway (MRO), Wawa, Sunoco and Gulf; nevertheless World Fuel Services controls less than 1% of the global market share in this area. In other words, by no means does World Fuel Services have a monopoly. In turn, these current market shares could provide the company with a bit of a growth opportunity.
Of course a common argument against World Fuel Services gaining new market share would be that it’s not especially easy to take business away from able competitors. However, even if World Fuel Services just maintains its market share, there still exists a thesis for growth. For instance, if one were to view Exxon Mobil’s (XOM) “view to 2040” you would find that the world’s population is expected to grow by 25% to 9 billion people by 2040. Further, fuel for aviation and marine will increase by about 75% and 90% respectively over that period – with the combined share of the market growing from today’s 20% of the total market to over 25% in the next few decades. On the other hand, demand for personal vehicle fuel is expected to plateau relatively soon. In addition, it is expected that North America and Asia Pacific will make up about 60% of the global transportation demand by 2040 – exactly where World Fuel Services currently operates.
Now to be sure, there are a variety of risks associated with this company. For instance, a recent train derailment hangs the potential for future lawsuits, the price of fuel is volatile at best and World Fuel Services’ growth has slowed as of late. There are always reasons companies carry risks; an investor’s job is to determine whether or not these adverse possibilities carry weight. With that being said, let’s take a look at how the company has recently performed.
15 Years of Growth
World Fuel Services Corp has grown earnings (orange line) at a compound rate of 16% since 1999, resulting in a $2.8 billion dollar market cap. In addition, World Fuel Services’ earnings have risen from $0.10 per share in 1999, to today’s forecasted earnings per share of approximately $2.81 for 2013. World Fuel Services has consistently paid a dividend (pink line) for the last two decades.
For a look at how the market has historically valued World Fuel Services Corp, see the relationship between the price (black line) and earnings of the company as seen on the Earnings and Price Correlated F.A.S.T. Graph below.
Here we see that World Fuel Services Corp’s market price previously began to deviate from its justified earnings growth; starting to become undervalued during the most recent recession and coming back to fair value as of late. Today, World Fuel Services appears to be fairly valued to slightly undervalued in relation to both its historical earnings and relative valuation.
In tandem with the strong earnings growth, World Fuel Services Corp shareholders have enjoyed a compound annual return of 20.1% which correlates somewhat closely with the 16% growth rate in earnings per share. A hypothetical $10,000 investment in World Fuel Services on 12/31/1998 would have grown to a total value of $150,262.17, without reinvesting dividends. Said differently, World Fuel Services’ shareholders have enjoyed total returns that were roughly 8.8 times the value that would have been achieved by investing in the S&P 500 over the same time period. It’s also interesting to note that an investor would have received approximately 2 times the amount of dividend income as the index as well.
But of course – as the saying goes – past performance does not guarantee future results. Thus, while a strong operating history provides a fundamental platform for evaluating a company, it does not by itself indicate a buy or sell decision. Instead, an investor must have an understanding of the past while simultaneously thinking the investment through to its logical, if not understated, conclusion.
In the opening paragraphs potential catalysts for growth were described. It follows that the probabilities of these outcomes should be the guide for one’s investment focus. Yet it is still useful to determine whether or not your predictions seem reasonable.
Four leading analysts reporting to Standard & Poor’s Capital IQ come to a consensus 5-year annual estimated return growth rate for World Fuel Services of 6.1%. In addition, World Fuel Services Corp is currently trading at a P/E of 14, which is inside the “value corridor” (defined by the orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, World Fuel Services’ valuation would be $60.73 at the end of 2018, which would be a 9.3% annualized rate of return including dividends. A graphical representation of this calculation can be seen in the Estimated Earnings and Return Calculator below.
Now, it’s paramount to remember that this is simply a calculator. Specifically, the estimated total return is a default based on the consensus of the analysts following the stock. The consensus includes the long-term growth rate along with specific earnings estimates for the next two upcoming years. Further, the dividend payout ratio is presumed to stay the same and grow with earnings. Taken collectively, this graph provides a very strong baseline for how analysts are presently viewing this company. However, a F.A.S.T. Graphs’ subscriber is also able to change these estimates to fit their own thesis or scenario analysis.
Since all investments potentially compete with all other investments, it is useful to compare investing in any prospective company to that of a comparable investment in low risk treasury bonds. Comparing an investment in World Fuel Services to an equal investment in a 10-year treasury bond, illustrates that World Fuel Services Corp’s expected earnings would be 3.8 times that of the 10-year T-Bond interest. This comparison can be seen in the 10-year Earnings Yield Estimate table below.
Finally, it’s important to underscore the idea that all companies derive their underlying value from the cash flows (earnings) that they are capable of generating for their owners. Therefore, it should be the expectation of a prudent investor that – in the long-run – the likely future earnings of a company justify the price you pay. Fundamentally, this means appropriately addressing these two questions: “in what should I invest?” and “at what time?” In viewing the past history and future prospects of World Fuel Services we have learned that it appears to be a strong company with reasonable upcoming opportunities. However, as always, we recommend that the reader conduct his or her own thorough due diligence.
Disclosure: No position at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.