2 Undervalued Stocks Effectively Growing by Acquisition

 |  Includes: INT, RS
by: Bret Jensen

World Fuel Services (NYSE:INT) - World Fuel Services Corporation engages in the marketing and sale of marine, aviation, and land fuel products and related services worldwide. Its Marine segment markets fuel and related services to international container and tanker fleets, commercial cruise lines, and time-charter operators, as well as to the United States and foreign governments. World Fuel is selling at a little over 14 times this year's consensus earnings and a bit more than 12 times next year's projected earnings. Consensus earnings estimates for both 2011 and 2012 have gone up over the past sixty days. In addition, INT has significantly beat earnings estimates each of the last four quarters. It sells at a paltry .11 times revenues. It also sells in the bottom half of its five year valuation range based on P/E, P/S and P/CF.

What's to Like – INT has a great balance sheet with no net debt. Organic growth from its land and aviation segments should drive volumes higher. Company has consistently integrated acquisitions well into its portfolio. World Fuel's earnings have increased an average of over 23% over the past five years and revenues averaged an over 15% increase despite the economic challenges. All of this for a stock with a P/E of 14. A more reasonable valuation would be at least 15 -16 times next year's consensus earnings of $2.86/share leaving us with a price target range of $43 - $46 roughly in line with Credit Suisse's and S&P's target price of $46.

Reliance Steel & Aluminum (NYSE:RS) - Reliance Steel & Aluminum Co. operates metals service centers. It provides metals processing services and distributes a line of approximately 100,000 metal products, including alloy, aluminum, brass, copper, carbon steel, stainless steel, titanium, and specialty steel products to fabricators, manufacturers, and other end users. The company's metals processing services include bar turning, bending, blanking, deburring, electropolishing, fabricating, forming, grinding, leveling, machining, oscillate slitting, pipe threading, and polishing. Reliance is selling for around 12 times this year's consensus earnings and just 9 times 2012's projected EPS. It has beat earnings estimates by over 15% in each of its last two quarters. In addition, earnings estimates for both 2011 and 2012 have moved up significantly over the last 90 days. It sells at .64 times revenues.

What's to Like – RS is the largest metals service center operator in North America, yet controls less than 5% of the market. It should benefit from acquisitions using its strong financial position to roll up competitors to build market share and synergies. Its product and geographical diversification insulate it well from any regional economic risks. It should also continue to benefit as the economy improves. It is a cyclical stock but a fairer value for RS would be 10-11 times next year's projected earnings of $5.93 a share or $60 to $66 which is substantially less than S&P's target of $75.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in INT over the next 72 hours.