WEX - Fleetcor Technologies: Well-Positioned To Deliver Strong Shareholder Value

Summary

• FLEETCOR is a leading global provider of commercial payment solutions with a diverse portfolio of products, including fuel cards, toll cards, lodging, gift cards, and more.
• The company benefits from strong secular growth drivers, including an increase in digital payments, recovery in corporate travel, and a shift toward fleet management solutions.
• FLEETCOR's high customer retention rate and diversified revenue streams provide a stable foundation for long-term growth and shareholder value.

Executive Summary

For investors with a longer-term focus, the current price of FLEETCOR Technologies ( FLT ) shares presents an attractive opportunity, with the stock trading at a low 12.3x 2023 P/E. Despite being grouped with other payment companies facing higher technology disruption risks, FLT has a solid track record of organic revenue growth and an impressive ~18% EPS CAGR over the past decade.

Situation Overview

FLT operates in several industries, including Fuel (accounting for 40% of 2022 revenue), Corporate Payments (23%), Lodging (15%), Tolls (11%), Gift (6%), and other (7%) (Source: FLEETCOR Form 10-K ). Although each category has unique characteristics in terms of customer base and product offering, they share some commonalities. Customers primarily consist of businesses, and the revenue models are predictable and recurring. The businesses also have specialized networks that create barriers to entry, and they employ similar selling systems. FLT holds strong market positions in most of its key end markets and, importantly, helps its customers save money and become more efficient. For example, in the Fuel business, FLT leverages its purchasing scale and utilizes a closed-loop system that removes third-party costs, resulting in significant cost savings for customers. Moreover, FLT's customers benefit from additional data that can help them drive greater efficiency across their business. FLT believes that the total addressable market across all its businesses is $125 trillion, while its controlled spend is $250 billion.

Fuel

FLT's Fuel business provides fuel solutions to businesses and government entities operating vehicle fleets, with a business mix of around 60% domestic and 40% international. The company has established partnerships with more than 55,000 gas stations that accept FLT's proprietary cards, which enable businesses to monitor and control fuel spending while providing essential analytics to customers. The Fuel business generates revenue from program-related fees, including transaction fees, network fees, card fees, and interchange. FLT negotiates lower prices for fuel purchases than retail prices, delivering savings to its customers and benefiting from the difference less merchant commissions and discounts. FLT's Fuel revenue drivers are fuel spread prices (accounting for around 10-12%), interchange (30-35%), fees (40%), and accounting servicing or program fees (15%). Partnerships with FLT benefit merchants by driving higher volumes to their locations, while customers receive discounts on retail fuel prices. Higher fuel prices generally translate to more substantial fuel revenue for FLT's Fuel business.

Corporate Payments

Corporate Payments is a set of solutions offered by FLT to help businesses streamline their back-office operations associated with different areas of spending, such as payroll, accounts payable, and cross-border payments. These products enable companies to reduce overhead expenses, save time, and manage B2B payment processing more efficiently. FLT's Corporate Payment suite includes virtual cards, cross-border payments, purchasing, travel and expense (T&E) cards, and accounts payable automation. Interchange generates more than half of FLT's revenue in this category, with fees and the FX spread on cross-border payments accounting for the rest. FLT's Comdata virtual card is integrated with customers' internal systems and runs solely on Mastercard's network, and the payment data is integrated with full remittance data to make it a superior product compared to ACH for reconciliation purposes. FLT's virtual card offers a significantly lower cost relative to checks, which can result in savings of up to ~$5 per check for corporate buyers, while suppliers benefit from easier reconciliation compared to ACH payments. Accounts payable automation tools also help companies outsource their AP process, reduce the strain on accounting departments, and improve their customer data.

Lodging

FLT's lodging solutions are aimed at helping corporate travelers and insurance policyholders find discounted hotel accommodations. Through its proprietary data management and payment processing systems, FLT is able to manage customer billing and reporting. Revenue is generated based on the number of transactions, or hotel room nights purchased by customers, with the company earning revenue from the difference between the amount charged to the customer and the amount paid to the hotel. FLT's lodging network includes more than 15,000 hotels, including major partners such as Marriott, Wyndham, and Hilton.

Tolls

FLEETCOR's toll-related operations are primarily based in Brazil, following the company's acquisition of Sem Parar. Through Sem Parar, FLEETCOR processes electronic toll payments for over 6 million tag holders in Brazil. These tags can also be used at more than 4,100 merchant locations to purchase additional services such as parking, fuel, car washes, and meals. By offering a more convenient and faster way to travel, while reducing manual labor and cash handling at toll booths, FLT has been able to establish a leading position in Brazil's electronic toll payment market.

In addition to providing electronic toll payment solutions, FLEETCOR's Sem Parar business also offers a range of other value-added services to its customers, such as real-time balance and transaction information, automatic account recharge, and access to discounts and promotions. Revenue for the toll business is primarily derived from fixed fees for access to the network and other ancillary services, as well as interchange on certain transactions.

Gift

FLEETCOR's Gift business is a global service that provides retailers with end-to-end solutions for gift card program management and processing, both in traditional plastic card form and in digital form. With operations in over 60 countries, FLT is a leading provider of gift card services, offering a wide range of features that can be tailored to meet the unique needs of each customer. Revenue for the Gift business is generated through two main channels. First, FLT earns revenue by processing gift card transactions sold by customers to end users. Second, the company also generates revenue from the sale of the physical plastic cards themselves, which are often sold in retail stores.

Other

FLT obtains revenue from a variety of other services, such as fleet maintenance, which is primarily focused on the UK market but also has a presence in Europe and Australia. The company also provides Employee Benefit Payments in Mexico and Brazil, as well as payroll cards.

With its leadership in B2B payments, FLT is in a strong position to capitalize on the shift from paper-based to digital payments. Its highly recurring business model boasts an impressive client revenue retention rate of over 92% and generates significant profitability. The company benefits from exceptional leadership under CEO Ron Clarke, who has a history of successful long-term capital allocation, including overseeing roughly 90 acquisitions of varying sizes (Source: FLEETCOR Form 10-K ). Clarke's ~5% ownership stake in FLT reflects his owner/operator mindset, which is viewed positively. Additionally, FLT's management team is committed to returning capital to shareholders, evidenced by their repurchase of $2.7 billion worth of FLT shares over the past two years, even as they kept net debt to EBITDA at a reasonable level of 2.5x throughout 2022.

Valuation

FLT's business model is less vulnerable to technology disruption compared to traditional merchant acquirers, which makes it a compelling investment opportunity. Furthermore, the company's attractive relative valuation makes it a promising investment option, and FLT has a track record of returning strong free cash flow to shareholders through share repurchases and M&A activities.

During its Q4 2022 conference call, FLT revealed that it expects to achieve an organic revenue growth rate of 10% in 2023, with an average fuel price of around $4. Additionally, the company is projecting a margin expansion of 200 to 300 basis points and an EPS of at least $16.75 (Source: FLEETCOR Q4 Earnings ). Over the long term, FLT is well-positioned to deliver high single-digit to low double-digit organic revenue growth and EPS growth of 15% to 20%.

Despite these impressive results, shares of FLT trade at a discount to peers (PayPal, Fiserv and Wex).

At a peer average multiple, FLT shares would be worth $255 per share, generating roughly 22% upside. More importantly, the business should continue compounding its intrinsic value at high rates for a long time and can potentially deliver strong IRRs at these levels.

Risks

Fuel prices and fuel price spreads can impact FLT's revenue, with approximately 12% of revenue tied to the absolute price of fuel and 5% related to fuel price spreads. FLT does not hedge fuel prices, which can lead to some volatility in its results. Additionally, FLT carries some modest credit risk with its customers, but the company's risk mitigation procedures and vetting procedures help to limit the risk. Finally, while EVs could be a headwind for FLT, the company has taken steps to position itself to participate in this nascent market by investing in EV software companies, acquiring an EV charging network & software solutions provider, and adding public acceptance networks for EV public charge points in the US and Europe.

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