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Shares of World Fuel Services (NYSE:INT) have been trading range-bound for years now, mostly having traded in a $20-$30 range in more recent times.
Once an M&A darling, driven by bolt-on dealmaking and organic growth, shares have been trading stagnant and have come down quite a bit since momentum peaked in 2015, and its shares did as well that year.
Volume trends and margins have been lagging ever since, as I picked up coverage again in the autumn of 2020.
Some Perspective
World Fuel Services provides fuel and related services to its global land, air and sea customer base. In a normal year 2019, the company supplied 20 billion gallons of fuel (equivalents) to these customers, generating $37 billion in sales in the process. These are typically very low-margin activities, with gross profits of $1.1 billion being equal to margins of just around 3%. Adjusted operating profits of $322 million worked down to operating margins of just below 1%, yet in relation to gross profits, this number was quite substantial.
Since the business peaked in 2015, shares have fallen from the $50s to the $20-$30 range following a downbeat performance of the marine unit, albeit that shares traded around the $40 mark ahead of the outbreak of the pandemic already. Earnings came in around $2.69 per share (adjusted earnings) with deleveraging allowing for some financial room to pursue some dealmaking again.
The Pandemic – 2020
While the pandemic clearly resulted in a big impact on revenues, on the back of the combination of price declines and volume declines, it created a lot of volatility which provided a lot of chances as well. In the summer of 2020, the company announced a $350 million divestment of its Multi Service payment solution unit, bringing in some cash at an uncertain period of time.
Second quarter sales for 2020 fell by two-thirds on the year before, yet the company maintained profitability, which is a very encouraging trend. Moreover, net debt of $305 million would be entirely wiped out following the Multi Service divestment. At the time, shares traded at $22 in October, granting the company a $1.4 billion valuation with 63 million shares outstanding and no net debt due. With earnings power trending at $2.69 per share in a normal year, valuations looked reasonable as there were no signs of financial distress.
Stagnating
After the cautious upbeat stance in October, shares rallied to the $30 mark in the time frame of a couple of weeks, and ever since shares have mostly traded in a $20-$35 range again, currently exchanging hands at $27. This leaves no capital gains in about two years’ time.
As it turned out, 2020 sales fell from $36.8 billion in 2019 to $20.4 billion, yet operating profits of $138 million were still solid, translating into earnings of $1.71 per share based on just below 64 million shares outstanding following some buybacks during the year. That being said, a substantial portion of earnings was aided by the gains on the Multi sale. Despite the buybacks, the company actually saw a net cash position of around $135 million by year’s end while no formal guidance was given for the year.
In October of the year, the company announced a huge deal as it has reached a $775 million deal to acquire FlyersEnergy, albeit that the last hundred million of the deal tag would only be paid out in two years after the deal closing. The company employs 475 workers which generates $2.4 billion in revenues from providing fleet fueling, fuel supply and lubricant distribution to 12,000 customers across the country.
The 0.3 times sales multiple stands in sharp contrast to the valuation of World Fuel itself, which typically trades below 0.1 times sales. Unfortunately, few financial details have been announced at the time surrounding the deal.
In February of this year, the company posted its 2021 results as revenues bounced back to $31.4 billion, although the fourth quarter run rate revealed a higher number going forward. Operating profits rose in a very modest fashion, up just $4 million to $142 million, explaining why shares were range-bound as net earnings of $63 million only worked out to earnings of $1.16 per share. Net cash balances were largely preserved around $150 million, albeit that this was ahead of the FlyersEnergy deal.
2022 So Far
In April, World Fuel posted its first quarter results, with net debt reported at $618 million following the closing of the FlyersEnergy deal. Revenues rose to $12.5 billion, aided by the deal to a minor extent, as operating earnings rose in a modest fashion to $41 million, up four million on the year before.
Second quarter results revealed an explosion in sales, aided by very high fuel prices across the globe. Second quarter sales rose to $17.1 billion as operating earnings rose to $53 million. Third quarter results remained solid with revenues reported at $15.7 billion as operating earnings rose in a rather spectacular fashion to $100 million due to favorable volatile developments in the marine business, this time contributing again positively for a change.
Strong profitability and a small increase in net liabilities related to derivate contracts made that net debt fell to $430 million, a nice result given the quarterly EBITDA number of $122 million, as EBITDA so far came in at $274 million this year, making that leverage is rapidly coming down.
The $0.67 per share quarterly earnings number has been quite strong, creating a $1.50 per share number so far this year, with earnings set to come in around track of $2 per share here.
Concluding Remark
While the third quarter has been very strong and gives some confidence for the investment case, it seems that the third quarter was a positive outlier, as the company clearly indicates on the conference call that a typically seasonally softer fourth quarter will become softer as well this year.
If earnings per share power at $2 per share is realistic, a resulting 14 times multiple looks reasonable. While strong earnings power results in reasonable leverage ratios, I am cautious as the secular growth is gone (despite dealmaking) and long-term headwinds to the business are seen, amidst the electrification of end markets.
That long-term threat is likely the driver behind modest multiples which can be applied to the business, and hence, I am not necessarily very enthusiastic on buying the shares here as the low multiple is not backed up by strong performance in recent years, not a solid long-term outlook.
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