This Market-Beating Manager Likes These Two Stocks

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Wallace Weitz, the portfolio manager of Weitz Partners Fund, has been beating the general market for a long period of time. In the past 20 years, he has managed to deliver a decent return of 11.10%, beating the S&P 500’s annualized gain of 8.20%.

In the second quarter 2013, Weitz initiated long positions in World Fuel Services Corporation (NYSE: INT) and ACI Worldwide (NASDAQ: ACIW). Let’s take a closer look to determine whether or not we should follow Wallace Weitz into those two stocks.

A lot of potential growth for this global fuel logistics business

World Fuel Services, founded in 1984, is a leader in global fuel logistics, selling fuel products and related services to a diverse customer base around the world. It has three main business segments: Aviation, Marine and Land. The Aviation segment is the main profit contributor, producing around $128.2 million in profits while the operating income of the Marine segment ranked second, at $103.2 million.

What I like World Fuel Services is its well-diversified customer base. In the Aviation segment, it services around 3,000 locations, including 2,300 airports, supplying 4.4 billion gallons. In the Marine segment, it has as many as 40,000 deliveries at 1,100 ports and in the Land segment, World Fuel Services delivered 3.1 billion gallons with more than 1,000 distribution locations in the U.S., the U.K., and Brazil. Moreover, World Fuel Services has a lot of advantage going forward with its global leading positions. Its Aviation segment has around 6% global market share whereas the global market share of the Marine segment is approximately 12%.

Since 1985, World Fuel Services has grown via acquisitions. Thus, investors should expect a high level of goodwill and intangible assets on the company’s balance sheet. As of June 2013, it had around $710 million in goodwill and intangible assets. However, because of the increasing retained earnings, its book value was much higher, at more than $1.6 billion. Consequently, its tangible book value is still positive at $890 million. We could conclude from this fact is that the company has managed to grow the business organically after its acquisitions.

Looking forward, there are a lot of reasons to be bullish about the World Fuel Services with the potential growth in the Aviation and the Land segments. The Aviation segment will experience good growth including Asia business expansion and the growing airline industry. For the Land segment, World Fuel Services is excited about the business organic growth and a strong acquisition pipeline in the U.S., and throughout the world. The company reported that it was working with Multi Service team to identify opportunities, including multi service fleet card and private label products. Although the Aviation and the Land segments are expected to enjoy good potential growth, the Marine segment seems to be challenging with the slack demand and lack of pricing volatility.

It is trading at $37.40 per share, with the total market cap of $2.7 billion. The market values World Fuel Services at around 8.90 times its trailing EBITDA (earnings before interest, taxes, depreciation and amortization).

Electronic payment business is growing, but ACI costs more

Wallace Weitz also bought ACI Worldwide in the second quarter 2013. ACI is one of the leading developers and installers of software products and services to facilitate electronic payments, withoperations in more than 36 countries. What investors is excited about ACI is its high level of recurring revenue, accounting for 70% of the total revenue. Moreover, it experienced an extremely high retention rate at 96%. The company ranks #1 or #2 in nearly all categories by industry analysts, controlling around 6% of the market spend. The company facilitated as much as a third of all SWIFT transactions, enabling $13 trillion in payments each day.

Going forward, ACI Worldwide expects to grow its recurring revenue base while maintaining its high retention rates. Moreover, it will expand customer relationships via cross-selling strategy. It also focuses on improving margins through operating leverage and realizing cost synergies from acquisitions. For the full year 2013, ACI’s revenue is estimated to be around $895 - $915 million, while the operating income might come in at $170 million - $180 million. The Earnings Before Interest, Taxes, Dividends and Amortization (EBITDA) for the full year is expected to stay in the range of $266 - $276 million.

ACI Worldwide seems to be quite fully valued. It is trading at $48.80 per share, a total market cap of nearly $2 billion. The market values ACI Worldwide at 17.1 times its trailing EBITDA.

Compared to Diebold (NYSE: DBD), which is in a similar business, ACI Worldwide has a much higher valuation. Diebold is trading at $30.50 per share, with the total market cap of $1.9 billion. The market values Diebold at around 11.7 times its trailing EBITDA.

Diebold is the self-service and security solution provider to financial, commercial and government and retail markets. It is the second largest ATM globally, controlling 50% of the North American ATM market and 25% of the global market. The company has been in the midst of turnaround, under the leadership of new CEO Andy W. Mattes. It targets to reduce costs by $100-$150 million by 2015. The company will implement several cost-cutting initiatives including 700 jobs cut and divesting several plants to suppliers to rationalize manufacturing facilities. The company estimated that around half of the savings would flow to the operating income.

My Foolish take

Of the two new picks of Wallace Weitz, I prefer World Fuel Services due to its strong potential growth in both Land and Aviation businesses. As the company currently pays only 6% of its earnings in dividends, I personally think that it could potentially raise its payout ratio in the future. If the payout ratio reaches 30%, its dividend yield could be 2% at its current trading price.

ACI Worldwide, in a long run, could also deliver a growing operating performance. However, because of the high valuation, investors might wait for a cheaper valuation before investing in this stock. 

Anh HOANG has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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