miniseries
FLEETCOR Technologies (NYSE:FLT) has delivered strong results for shareholders since becoming a public company in December 2010. Since its IPO, FLT has delivered a total return of 979%. Comparably, the S&P 500 has delivered a total return of 404% during the same time period.
FLT’s strong performance for shareholders has been driven by strong performance in its underlying business as EPS has grown at a nearly 15% CAGR over the past 10 years.
Despite having a market cap greater than $20 billion, FLT is covered by relatively few analysts on Seeking Alpha and has not been covered since October 2023. The three most recent Seeking Alpha articles on the stock have all been Hold ratings. There are four reasons why I am more bullish on the stock and am initiating coverage with a buy rating:
1. High diversified and high-quality business model
2. Potential beneficiary of increased EV adoption
3. Aggressive share repurchase program
4. Highly attractive valuation vs the broader market
5. Attractive valuation relative to historical norms & reasonable valuation vs peers
1. Highly diversified and high-quality business model
FLT is a leading global business payment company that specializes in helping companies better manage and track expense-related purchasing. The Company’s current segments include Fleet (~38% of revenue), Corporate Payments (~27% of revenues), Brazil (~14% of revenues), Lodging (~15% of revenues), and Others (~7% of revenues.)
The Fleet segment, which includes the company’s fuel solutions business with the exception of Brazil, generates revenue through program fees such as transaction fees, card fees, network fees, charges, and interchange.
The Corporate payments segment includes the company’s corporate payments business outside of fuel and lodging. The Lodging segment provides hotel payment services and generates revenue based on the difference between the amount charged to a customer and the amount paid to a hotel for a given transaction and commissions paid by hotels. The Brazil segment includes all of the company’s operations in Brazil while the Other segment includes the Gift and Payroll card businesses.
The company generates ~58% of total revenue in the U.S., 14% in Brazil, 12% in the U.K., and 17% in other countries.
FLT is clearly diversified in terms of both its product offering and its geographical exposure. I view this as a key positive as the company is not overexposed to potential challenges in any given part of its business or geographic region that may arise.
In addition to being highly diversified business, FLT is a very high-quality business. While the company faces competition in all of its core businesses, FLT has built up competitive advantages due to network effects and specialization. FLT enjoys a very strong customer retention rate of 91.2% which shows the stickiness of the company’s business model.
Further evidence for the relatively strong competitive advantage that the company enjoys can be seen in the high and stable profit margins and steady EPS growth. Historically, FLT has achieved an average profit margin of ~29% and has grown EPS at a nearly 15% CAGR over the past decade.
FLT Investor Presentation
2. Potential beneficiary of increased EV adoption
Given FLT’s significant fuel business, one natural investor concern is that a transition towards EVs may result in reduced revenue as the cost for charging is significantly less than gasoline. However, the company has built out a very strong EV offering which includes ~600k in network chargepoints and sophisticated EV software and measurement systems.
The company is furthest along with its EV product rollout in the UK where it has launched Chargepass, a 3 in 1 commercial fleet solution. Thus far, the results have been impressive with EV-driven revenue now accounting for more than ICE-driven revenue. EV cards currently account for 36% of total cards in the U.K. but have contributed 52% of total revenue. This suggests that EV cards result in more revenue for FLT than traditional ICE cards. The implication of this is that as EV adoption expands globally, FLT is poised to benefit.
FLT Investor Presentation
FLT Q3 Investor Presentation
FLT Q3 Investor Presentation
3. Aggressive share repurchase program
Over the past five years, FLT has been an aggressive repurchaser of its own shares. As shown by the chart below, the company has reduced its share count by nearly 16% over that time period.
During Q3 2023, FLT repurchased $530 million of stock including a $450 million accelerated share repurchase agreement which was completed at a price of $270.04 per share. As of the end of the quarter, the company had $700 million remaining under the current authorization. At current prices, this represents ~3.3% of the company’s total market capitalization.
I view the buyback favorably as it suggests that management views repurchasing its own shares as more attractive than returning capital to shareholders via dividends. Moreover, when fundamentals and valuation are strong, as I believe the case is with FLT, I prefer to see companies repurchasing shares as opposed to paying out dividends. Share repurchases allow investors to compound their investment on a tax deferred basis and give investors better control regarding the timing of realizing gains for tax purposes.
I expect the company to continue with large-scale repurchases in the months ahead, which should be supportive of the stock.
4. Highly attractive valuation vs the broader market
FLT trades at 15x consensus FY 2024 EPS and 13x consensus FY 2025 EPS. Comparably, the S&P 500 currently trades at 22x consensus FY 2024 earnings.
In addition to trading at a lower valuation than the broader market, FLT has better growth prospects. FLT is currently expected to grow FY 2024 EPS by 14% and FY 2025 EPS by 16%. However, I view these estimates as fairly conservative given the fact that the company has guided to 15%-20% annual EPS growth over the medium term. Comparably, the S&P 500 is expected to grow FY 2024 earnings by ~12% and historically has grown earnings at a high-single digit rate. Thus, based on FY 2024 growth figures FLT trades at a forward PEG of 1.07 while the S&P 500 trades at a forward PEG of 1.83.
Given the fact that FLT is a high-quality business with above-market growth prospects, I believe it should trade at least in line with the broader market. A forward P/E ratio of 22x would imply a fair value of $426 per share for FLT, which represents a ~45% premium from current prices.
5. Attractive valuation relative to historical norms & reasonable valuation vs peers
FLT is currently trading at a substantial discount to its average historical norm valuation. Historically, FLT has traded at an average trailing P/E ratio of 27.5x vs 23x currently. FLT is also trading at a discount relative to its average historical EV/EBITDA and EV/Revenue valuations.
I do not view the discount as being warranted as FLT has future growth prospects which are in line with historical growth prospects.
FLT is trading at a reasonable valuation vs peers in the payments business. WEX Inc. (WEX) is arguably the company’s closest peer and trades at a modest discount to FLT but is growing more slowly, has less scale, and is a lower-margin business. JKHY trades at a higher valuation than FLT but is exposed to a different part of the payments value chain as it is more focused on payment software solutions for small and midsize banks.
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Q4 2023 Earnings Preview
FLT is scheduled to report Q4 2023 earnings on February 7, 2024, after the market closes. Consensus estimates call for the company to report normalized EPS of $4.48 per share which represents a ~10.9% on a year-over-year basis. Revenue is expected to come in at $970 million which represents a ~9.8% increase on a year-over-year basis. Over the past 3 months, 6 analysts have raised their EPS estimates for the quarter while 8 analysts have lowered their EPS estimates for the quarter. This suggests there is some uncertainty regarding the direction of things heading into the report.
Historically, FLT has almost always exceeded consensus estimates. For this reason, I would not be surprised to see the company report better-than-expected earnings and the stock move higher. I would view any pullback related to slight earnings miss as a buying opportunity.
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Risks To Consider
One risk to consider is that FLT is exposed to broader economic conditions. If the economy were to experience a slowdown, then corporate spending would decline. Under these circumstances, FLT would find it difficult to meet current earnings expectations. I do not currently expect a near-term economic slowdown but it is a risk I continue to monitor.
Another key risk to consider is rising interest rates. While the company’s leverage ratio of 2.66 represents an improvement from 2.8x at the end of 2022, it remains moderately high for a fairly cyclical business. A significant increase in interest rates from here would lead to further increases in interest expense which could result in lower EPS growth than is currently expected.
The effects of a fairly cyclical business and a moderate amount of leverage can be seen in the fact that FLT has exhibited a historical average 3-year trailing beta of 1.3x. Thus, investors considering a long position in FLT should be aware that the stock tends to be more volatile than the broader market.
Conclusion
FLT is a high-quality business with a history of delivering strong results for shareholders. The company benefits from network effects and has a very high degree of customer retention. Despite operating in a fairly competitive business, FLT has been able to consistently deliver high profit margins.
Recent success of the company’s EV-based business in the U.K. suggests that the shift towards EVs may benefit the company over the long term in terms of increased revenue opportunities.
FLT trades at a substantial discount to the broader market despite having superior growth prospects. I do not view this discount as warranted and believe FLT should trade at a multiple which is at least in line with the broader market. Based on this view, I believe a reasonable estimate of fair value for FLT is $426 per share.
In addition to trading at a highly attractive valuation vs the broader market, I also view FLT’s current valuation as attractive relative to the company’s own historical valuation range.
For these reasons, I am initiating FLT with a strong buy rating. I would consider downgrading the stock if the valuation becomes less attractive or the company fails to deliver EPS growth in line or better than current expectations.
