World Fuel Could Be a High-Octane Stock


By Gene Marcial Looking for an outside-the-box oil play? Some investor groups think they've found one in World Fuel Services (INT). They see the Big Board-listed company as an oil play without having to bet on Big Oil or on various oil-and-gas drillers and refiners. So far, these investors have been well rewarded.

Shares of Miami-based World Fuel have outperformed, by a long shot, many of its oil-industry brethren. The stock has more than doubled in a year, surging from $7.95 a share on Mar. 12, 2001, to $18.54 on Mar. 11, 2002. And some analysts believe it still has a long way to go.

Joseph Chumbler of Stephens, an investment firm in Little Rock, Ark., believes the stock is considerably undervalued based on his 12% to 15% projected earnings growth over the next few years. Chumbler rates World Fuel a buy and has a 12-month price target of $25.

IMPROVED MARGINS. Why is the stock on fire? World Fuel is the largest independent marketer of fuel and related services to more than 1,000 marine and 1,400 aviation customers worldwide. With 29 offices in 15 countries and about 350 employees, it provides around-the-clock refueling services to over 800 seaports and 1,100 airports.

Using projected sales of $1.37 billion in the year ending Mar. 31, 2002, Chumbler expects World Fuel to earn $1.51 a share, vs. $1.11 a year earlier. Sales in fiscal 2001 -- $1.5 billion -- were stronger because of an increase in world oil prices. But the more recent year's earnings benefited from improved operating margins in the marine segment due to lower expense provisions for bad debt.

For fiscal 2003, Chumbler sees earnings of $1.70 a share on revenues of $1.47 billion. Now trading at 10.5 times the 2003 estimate, the stock would be at $25 on a p-e multiple of 15.

"COMPELLING OPPORTUNITY." With the oil market so unpredictable, one of World Fuel's values is its "ability to be successful in volatile and uncertain markets," says Chrystyna Bedrij of Griffin Securities in New York. It's a "compelling investment opportunity," she adds, because of its global reach, market-share leadership, attractive suite of services, and strong growth prospects.

Chumbler says World Fuel is well positioned for "solid earnings growth" because of its "extensive expertise in global fuel-supply markets and deep understanding of and broad presence" in seaports and airports worldwide.

As a marketer, World Fuel acts either as a broker or reseller. When brokering fuel, it's paid a commission for its services by suppliers. Among other things, World Fuel provides market information to end users, negotiates fuel prices between buyer and supplier, and expedites deliveries, a service that World Fuel subcontracts.

ONE-STOP SERVICE. As a reseller, it enters into "back-to-back transactions" whereby it aggregates demand among users and buys fuel for the group at a competitive price, including a markup that becomes World Fuel's profit.

As a broker or reseller, World Fuel doesn't have to maintain any inventory. It uses third parties for deliveries and fueling services. With outsourcing increasingly popular among both end users and suppliers, demand for World Fuel's one-stop services has increased.

"The company provides market intelligence, access to quality and competitively priced marine fuel virtually anywhere in the world 24 hours a day, every day of the year," says Chumbler. World Fuel also extends credit to customers. The company markets some 12% of the estimated 150 million metric tons of marine fuel consumed annually worldwide, notes Chumbler.

ROOM TO GROW. In the aviation market, World Fuel primarily serves second- and third-tier carriers -- passenger, cargo, corporate, and military fleets. It provides fueling services to less than 5% of its target market in aviation, so it has significant room to grow, says Chumbler. One other noteworthy fact, he says, is World Fuel's strong balance sheet: It has negligible debt, cash on hand of $56 million, and $30 million available in credit lines.

Since World Fuel's aviation customers aren't the major carriers, September 11 had little impact on its business. In fact, security concerns and fear of flying on commercial airlines have increased demand for smaller private aircraft and military planes, which are serviced by airports that are World Fuel's core customers. With the economy now rebounding, World Fuel's wheels could get even more grease. Marcial is BusinessWeek's Inside Wall Street columnist


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