World Fuel Services Corporation: Time To Deploy Some Capital
- INT has all the hallmarks of a quality value play.
- Downside is limited due to balance sheet strength and strong cash flows.
- We are looking at the August or November out of the money put options for our long strategy here.
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World Fuel Services Corporation (NYSE:INT) acts as a middleman between the refineries and fuel customers in the land, aviation and marine industries. This stock came across our desk from a screen we ran where the objective was to find profitable dividend-paying stocks which were selling below their intrinsic values.
In investing, we get paid to predict the future. With the exception of the health and food industry to name but a few, most industries have been battening down the hatches in order to withstand the glaring drop in demand as a result of the pandemic-driven lockdowns. World Fuel Services is no different. Although the first quarter reported, for example, volume of 1.4 billion gallons in the land segment (which was a 3% increase), a significant decline is expected in the second quarter due to the prohibition of travel in the US for non-essential work in the beginning of the lockdown. Volumes in the aviation and marine segments were both down 6% over the first quarter of 12 months prior. Lower fuel prices resulted in sales dropping 8% in the first quarter to come in just over $8 billion.
On the bottom line side, net income came in at $41.6 million which was an 11% increase over the same quarter of 12 months prior. The real carnage with respect to volumes will come in the second quarter which is why management has cut or significantly reduced all discretionary spending as well as the capex budget in order to protect cash flows as much as possible. With some luck, INT will only post a light loss in the second quarter before rallying back strongly in the final two quarters of the year.
We believe it is fair to say though that the aviation sector will remain subdued in the near term at least until a vaccine becomes available. The land sector should improve quicker but the marine sector also will most probably be a slow ramp-up to former levels. Saying all of the above is why we need to continue to focus on the areas we can control. With respect to INT for example, there is a lot to like here with respect to the firm's dividend, valuation and how oversold shares are trading at present on the long-term chart. When the future is unknown (now more than ever), what we must continue doing is to stack the odds in our favour. Here is how we view INT at present with respect to potentially getting long this stock.
First off, with respect to INT's cash flow. Over the past four quarters, the firm generated $151 million in free cash flow. This number covered the $121 million in share buybacks as well as the $24 million in dividends. We obviously favour companies which return cash to shareholders. Suffice it to say, even if INT were to decide to cut these benefits to shareholders to protect liquidity, the firm is working off a solid cash flow base which is encouraging. Also do not be fooled by the below-average 1.54% yield. The dividend payout was increased by 67% last May to now be $0.10 per share. Furthermore, there is still ample room to keep on growing the payout.
Secondly, shares are currently trading under book value (0.9). This is the lowest book multiple (besides 2018) that we have seen shares trade at over the past decade. As we can see from the chart above, when shares stooped to a book multiple of 0.8 back in 2018, we witnessed a strong rally due to aggressive buying returning en masse.
Another strong reason to get long this name is how profitable the corporation is. INT's ROA and ROE for example come in at 3.26% and 9.93% respectively. The trend here has been favourable with these metrics as we have seen constant upticks for the past 3 consecutive years now. Yes, we are going to see a decline here in the second quarter and beyond but the fundamentals suggest that INT should be able to bounce back quickly when demand for its products return.
All of the above looks good but how could we stack the odds even more in our favour? Well, considering how high implied volatility is at present in some of INT's options chains, we are looking at selling put options in order to put long deltas to work. The benefit of this strategy is that we get to buy a stock we like at a discount and/or we get to collect the options premium by simply selling the put options. For example, some of the out of the money put options (OTM) in August this year are reporting over 100% implied volatility. This is a rich premium and we intend to take advantage.
Therefore, to sum up, although INT had a pretty impressive Q1, Q2 is expected to be ugly with the firm expected to report a loss. The valuation, dividend and profitability numbers all look strong though, which reduces risk. To reduce risk even further, we may sell options here due to IV being presently on the high side. We will place this trade shortly.
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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in INT over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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