Basic Business:

Fleetcor is a global provider of workforce payment products, offering fuel card payment solutions in both North American and international markets. Fleetcor also offers lodging, corporate payment, toll products, and gift cards, among other solutions. In addition, the company provides fleet-related and workforce payment products, such as employment benefits and mobile telematics. Fleetcor operates a close-loop network that allows customers (e.g., truck drivers) to take advantage of co-branded cards that give them special discounts on the price of gas, as well as on relevant car-related products at gas stations and convenience stores. Further, the company engages in issuing and processing data, enabling routing, authorization, and settlement of transactions. Fleetcor largely earns its revenue on a per transaction basis, particularly for credit cards and gift cards. Overall, Fleetcor’s annual revenue base is around $2.8 billion and its market cap is approximately $25 billion.

Valuation

When we compare Fleetcor against its peers in the payments industry, such as GPN, ADS, FISV, and FIS, we continue to estimate that FLT merits a P/E multiple of 26x on 2020 earnings. When we apply this multiple to our 2020 revised EPS estimate of $12.69 (down from $12.88), we get the target price of $330.

Thoughts Ahead of 3Q Results :

We estimate FLT results to be fairly in line, with organic revenue growth coming in at 7.5%-8.2%, driven by the MasterCard product, CLC segment, as well as the European Shell business. Further, Comdata should contribute at least 40% of total organic growth. Further, we expect the company to deliver double digit growth from the Canadian market, driven by recent outsourcing deals. We believe that the Street’s more moderate revenue growth (which is approximately 50-70 bps slower than ours) does not incorporate new Shell markets in Europe and also assumes about 10% Y/Y growth in the UK’s Epyx maintenance business, whereas our estimates are at ~13%. At the same time, we are modeling relatively flat revenue growth for Mexico and Russia, as well as single digit decline for Brazil, mainly due to recent market pressures. We also expect M&A activity in 2020 to come primarily from Europe, possibly as much as $200-$300 MM channeled toward new deals. Among updates, the company may moderately increase share buyback authorization, perhaps by $100-$200 MM, which is always an important step (when they take it), since FLT has historically been so acquisition-driven, averaging as much as $1.5 billion over the three-year period.

Near-Term Catalysts:

We expect the following several catalysts to justify our target price in the near term.

1) Expect Tailwinds from the International Business: Despite continued macro headwinds and continued currency pressures, we believe that the European business is the key offsetting revenue booster, particularly in Western Europe, where the fleet-driven business, as we know it in the US, has not yet been well established, and usually grows in double digits.

2) Domestic Business Remains Solid:

We expect another strong performance from the company’s core revenue drivers, such as Comdata and CLC businesses. We estimate Comdata growth at 8% Y/Y and CLC growth at 6.5% Y/Y. Further, we expect further tailwinds from the MasterCard product, which saw very strong performance over the last several quarters, despite the tough comps.

3) Large Acquisition on the Horizon?

Recall that the company is guiding to approximately $1.5 billion in deals over the three-year period. With the most recent large acquisition (of Comdata) dating to several years ago, we believe that Fleetcor may choose to pursue another meaningful deal (at $500-$700 MM+) in 2020.

4) Expansion Outside of Traditional Fleet Business:

Over the last several years, we have seen Fleetcor gradually expand outside of its traditional fleet business toward other non-core products and services. We believe that over time FLT may actually consider pursuing other co-branded partnerships, such as those within department stores or with famous brand names, such as GPS and JC Penney. Given the high profitability of those businesses, we expect them to be accretive to the company’s EPS, and adding an important diversification element.

Guidance Update:

Over the last several months, oil prices hovered in the $60-$75 range, providing a meaningful boost to Fleetcor’s revenues. This in itself should be enough to help Fleetcor continue guiding to double-digit revenue growth in 2020. Recall, that higher oil prices lead to more spending at the pump, which translates into higher fees for Fleetcor’s credit cards. Note that oil-driven segments constitute approximately 18-19% of the company’s total revenue. However, we do believe that FLT may choose to go conservative this time and guide somewhat lower for 2020, because even though there are some short-term upward shocks for oil (e.g., Saudi Arabia’s recovery from the drone attacks), the world economy overall is cooling, which may lead to lower oil prices next year. Therefore, we believe that FLT management may hedge their bets and provide a somewhat tempered guidance for next year.

Risks to Our Thesis

We see the following four core risks to our thesis.

1) Oil Prices Drop:

This is the most obvious risk that comes to mind when people analyze Fleetcor. However, it is important to reiterate that only less than 20% of the company’s revenues rely on oil prices.

2) Pricing Wars:

We believe that FLT may face pricing competition from some European providers. Thus far, it has been relatively immune to such pressures in the United States, but as other companies make inroads into this lucrative co-branded market, Fleetcor may face a difficult choice of lowering prices.

3) Rising Wages:

With the US job market enjoying the lowest unemployment rate since the 1960’s, there has been intense upward pressure on wages in recent months, a pattern whose costs may ultimately unfavorably impact the P&L.

4) Deadweight of Non-Core Businesses:

The company’s core fleet business has been doing extremely well over the years, prompting Fleetcor to diversify its portfolio via a number of non-core acquisitions. The results have been mixed at best. We fear that some of the company’s recent businesses, particularly on non-payments side, may eventually prove to be a deadweight for its P&L.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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2019-10-10