2023-03-29 04:21:59 ET
Summary
- World Fuel Services announces an earnings beat in Q4 of $0.54 per share.
- Sales and earnings for fiscal 2022 came in well ahead of fiscal 2023 but interest expense jumps significantly.
- Trading conditions need to be aligned to report 5-10% bottom-line growth in fiscal 2023.
Intro
Our most previous commentary on World Fuel Services Corporation ( INT ) was in November 2021 when we stated that the Flyers acquisition had the potential to drive the company forward. On this point, management can really have no complaints with respect to how Flyers has worked out so far. Volumes in the Land segment (Principally driven forward by Flyers Energy) were up by double digits percentages both in Q4 as well as fiscal 2022. Gross profit for the Land segment came in at $476 million for the full year - almost a 60% increase on where this segment stood at the end of fiscal 2021.
Furthermore, with margins to the fore in the marine segment in fiscal 2022 as well as a 20%+ volume increase in the Full Aviation segment, the full-year financials look rather impressive compared to fiscal 2021. Gross profit grew by over $300 million to come in at $1.089 billion and net profit increased by 55% to hit $114.1 million.
However, it will be interesting to see how fiscal 2023 turns out now that the quarterly tallies will have the "Flyers" comparables to deal with. Consensus is predicting roughly 6% growth in bottom-line earnings (EPS of $2.16) on sales of $52.4 billion (11% Contraction). Although margins are expected to increase and recent sales revisions look encouraging, that expected double-digit percentage drop in sales is noteworthy and demonstrates that INT needs to remain aggressive with its ongoing M&A strategy.
Difficult Investing Decisions
This is where things begin to get tricky for World Fuel Services for the following reasons. First up is the level of debt ($818 million) that the company holds on its balance sheet which is obviously more difficult to service in a high-interest rate environment. In fiscal 2022 for example, net interest expense came in at $110 million which is an elevated number when we see that the company booked $279 million in operating profit in a much improved year.
Then you have the sustainability part of the business which really remains a conundrum for the market when one looks at how the energy sector in particular is expected to transform over the next few decades. INT's objective here is to be in a position to leverage its existing logistics setup in order to take advantage of the decarbonized future which is expected to be on the scene sooner rather than later. This means INT must continue to invest in zero or low-carbon energy sources alongside its conventional businesses in order to stay ahead of the curve. The risk here though is allocating capital poorly just for the sake of investing in new technologies that are expected to be in high demand in a decarbonized world. As always, investors will need to see a line of sight to better profitability on any M&A deals going forward.
Technicals Point To Poor Profitability
This "unknown" element may be why INT's intermediate technicals continue to print lower highs on the technical chart (Which point to a bearish descending triangle formation). Suffice it to say, given the pretty steep decline which has taken place in the share price since the start of 2023, we believe there is every opportunity that shares now test their 2022 lows of close to $20 a share as we see below.
If these potential near-term lows correspond with INT's first-quarter earnings report (Due next month), a solid earnings beat would most likely provide the catalyst for bouncing off that multi-year support area. The valuation from an earnings perspective already got dialed down from the "Flyers" purchase so INT at $20 would bring the forward GAAP multiple further down & below the 10 mark (Based on 2023 earnings of $2.16 per share) which may attract value investors.
What investors really need to see however is improving profitability . Margins are so tight in INT that if trading conditions were to deteriorate any bit (whether this be interest rates or something like sustained backwardation in aviation), 2023 sales could fall more than expected. Then, that $20 level could easily come under pressure which is why investors should wait until the company's next earnings report before formulating a strategy here.
Conclusion
Although fiscal 2022 was a sound year growth-wise in terms of volumes across INT's principal segments, core profitability remains a worry as trailing gross profit margins currently come in at 1.84%. Furthermore, the company's high debt load limits the scope concerning M&A as interest rates have spiked the interest expense to the upside. We will revisit INT post the company's upcoming Q1 earnings. We look forward to continued coverage.
For further details see:
World Fuel Services: Uncertainty Still Has Investors Sidelined