A Pair of Energy Growth Plays

 | May 30, 2012 | 5:00 PM EDT
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Tuesday was one of only a few significant rallies in May, as the major indices rose roughly 1% across the board. The beaten down energy sector managed to outperform the overall market for a change, as well. This sector has gone through a very tough couple of months as oil prices have fallen significantly and natural gas prices remain close to historic lows. One of the strategies I am employing in this area is to pick up stocks that have fallen along with the sector but whose earnings are not that correlated to the price of energy. Here are two selections in that category with low valuations and good growth prospects.

World Fuel Services Corp. (INT) is the world's largest fuel logistics company and engages in marketing, selling, and distributing aviation, marine, and land fuel products and related services globally.

Four reasons INT is a solid long-term value at $38 a share:

  • Although World Fuel is the largest company in this space, it controls less than 10% of the total market and has plenty of market share growth ahead. The company has grown revenues at around a 13% annual rate over past five years and analysts expect sales growth in the double digits in 2012 and 2013.
  • The stock is cheap at 7% of annual revenues and less then 12x forward earnings.
  • INT sells in the bottom third of its five-year valuation range based on price to earnings, price to book, price to sales, and price to cash flow.
  • The stock is about 30% below consensus price targets. The median price target on the stock is $52. Standard & Poor's gave INT its highest rating, Strong Buy, and a $54 price target.

Holly Energy Partners (HEP) operates a system of petroleum product and crude pipelines, storage tanks, distribution terminals, and loading rack facilities, primarily in the Southwest.

Four reasons HEP has value at $56 a share

  • Eighty percent of the company's revenue stream is fee based and provides a very stable source of earnings.
  • HEP provides a 6.3% yield, has doubled its payout over the last eight years, and recently announced its 30th consecutive distribution increase.
  • The company has a low beta (.57), more than doubled its revenue between 2007 and 2011, and S&P projects annual EPS growth of 17% over the next three years.
  • The company's main assets are located in the Southwest, which should continue to experience average population growth, as well as provide a pro-business/pro-energy policy foundation.



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