Wouldn't Call These Returns 'Mundane'

 | Dec 18, 2012 | 11:15 AM EST  | Comments
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"Simplicity is the ultimate sophistication." -- Leonardo da Vinci

One of the most influential books early in my investing career was Beating the Street by Peter Lynch, the superstar money manager from Fidelity. One of the core things I distinctly remember pulling from the book was that simplifying things can often be the best investment approach. Lynch made a career of finding great investments in mundane industries. Instead of finding the next Google (GOOG) or Salesforce (CRM), Lynch found firms that were taking market share in fragmented, slow-growing industries.

His philosophy was that these stocks were often overlooked by analysts, and that the companies did not attract competitors, since the industry overall was only growing 1% to 3% per year. The two examples I remember were his investments in Service International (SCI) and Safety Kleen. Both turned out to be more-than-10 baggers, and he achieved this simply by betting on companies that consolidated, respectfully, the funeral home and grease-trap-cleaning businesses over more than a decade. These are hardly sexy investments, but it's a very effective investment strategy.

I am reminded of this simple lesson every time I look at my investment in World Fuel Services (INT), which is a part of my core portfolio. World Fuel is the global leader in the distribution of fuel products. The company generates some $40 billion in annual sales and has more than 6,000 locations, yet most investors are probably not familiar with its stock. This company services aviation, marine and land customers worldwide.

Despite this, World Fuel's market capitalization is only around $3 billion, as it operates in a low margin/low growth industry. What the company does better than anyone in the space is to grow via buyout. It makes several acquisitions a year, integrates them well and continues to grow market share because of them.

For instance, on Monday it agreed to buy the payment-processing assets of Multi Service, which serves the same customers as World Fuel. Assuming the deal closes, it will cost the company $137 million, and should be accretive to earnings by $0.12 to $0.16 a share in its first year. This acquisition shows the power of World Fuel to continue driving sales and earnings through acquisitions within the sector.

Despite a challenging world economy over the past five years, in that period World Fuel has managed to grow earnings and revenue by approximately 20% annually. From 2002 to 2011, the company grew per-share operating cash flow every single year, even during the financial crisis. At year-end 2011, OCF per share had increased by 11x vs. year-end 2002.

Because of the nature of World Fuel's business and its business model, top- and bottom-line growth tends to be lumpy on an annual basis -- but they're rock-solid over a longer period. An investment of $10,000 in the stock five years ago would be worth more than $26,000 today. A $10,000 investment made 10 years ago would be worth more than $100,000. A post-acquisition multiple of 12x forward earnings seems like a cheap price to pay for this boring market leader in a mundane business.

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