Here's an analysis of a company that I came across which I struggled to value at first. But as I continued to read and learn about the industry, it continued to raise my interest. Take a read and see whether this is an idea that can suit you at the right price.
FleetCor is a company with a strong moat in an attractive industry and performing well for shareholders. The company has more room for growth but some questions have to be asked as to whether this will make it a good investment.
What is FleetCor Technologies?
Having missed out on Visa (V) and MasterCard (MA), stumbling upon FleetCor is a pleasant surprise. FleetCor Technologies is a company that provides fuel cards and payment products used by employees. The company also has lodging cards, but since the overall concept is the same, I will focus most of the discussion on fuel cards.
The important thing to understand is that although I've included Visa and MasterCard into the conversation, fuel cards and credit cards are different in many ways.
First, what is a fuel card?
The differences between a credit card and a fuel card is that a fuel card, as the name suggests, is mainly used for fuel. Companies that require lots of travel in their line of work gain a lot of benefits with issuing fuel cards to their employees instead of standard credit cards.
Here are the pros and cons taken from Wikipedia.
Discount fuel prices (i.e. wholesale prices)
Ability to choose from multiple providers like Shell, Esso, Keyfuels, Texaco etc. This enables better pricing due to competition.
Need for carrying cash (or giving cash to drivers) eliminated
Prevention of fraud
Filling patterns can be customized by Smartchip technology
Fleet efficiency & MPG reporting
Reduced administration via management tools
Ability with some card management tools to capture private/business driver mileage split
Card stopping/cancellation periods can sometimes be longer
Greater liability for fraudulent transactions often placed on customer
Credit periods typically shorter
Retail cards typically offer pump prices (usually higher than wholesale) and occasionally additional surcharge
Annual or monthly card provision charge sometimes applied (usually bunkered)
The pros far outweigh the cons and should now provide a clear picture of the business model.
FleetCor's Business Model is a Competitive Advantage
FleetCor has been around since 2000 and has grown mainly from acquiring smaller fleet card companies around the world. The company does business in over 18 countries and such an extensive network of where its cards are accepted that it would literally take a decade to replicate anything in the same size and scale. There is also switching cost involved in such a network. Once you have gas stations equipped with hardware and software to work for these type of fuel cards, it's very difficult to switch. It's different to just accepting credit cards and performing transactions. Based on the data that fuel cards track, the data provided to the system from every gas pump is much more than the average credit card transaction.
This is a Very Profitable Business
Visa and MasterCard are very profitable businesses. They receive a percentage in fees for every swipe. Since I sell stock valuation tools on this site, I have to accept credit cards. So I understand how powerful this industry is in terms of profitability.
The fee per swipe racks up and I understand why little mom and pop shops don't like to take AmEx (AXP) cards or why they make you spend at least $10 before you can use a credit card.
Actual numbers showing profitability can be seen below.
High Insider Ownership is a Good Sign
The CEO holds a 5.5% stake in the company of a current $6B company which is more than $300m. Two members of the board are also part of Summit Partners which owns 28% of the company. These insiders have a strong interest in the company and with key investors on the board of directors, it's pretty clear intentions are aligned with shareholders.
There are Always Risks
The majority of FleetCor's revenue is dependent on fuel prices. Since the company receives a percentage of the sale, if fuel price drops, then the fee also decreases. I don't see this playing out though. As the government continues to bring in more regulation and stricter practices, the cost to refiners will go up, which will get passed onto the customer at the pump.
Another big risk is from competition. If companies like Shell (RDS.A) or BP (BP) really get aggressive and try to launch their own version of the fuel cards and prevent their gas stations from accepting FleetCor's cards, it will be a huge blow. But this is something that the management has always known about and although it's been tried before, it has not succeeded.
The balance sheet is full of goodwill and intangibles from all the acquisitions. It makes up 51.1% of total assets and the debt to equity ratio is at 71%.
What better way to identify profitability than ROE and CROIC which is an improved version of ROIC. Some numbers to bring it all together.
Strong returns for any business, but let's take it a step further. I have been using the DuPont method a lot to really dig into whether the ROE is organic or artificial.
The five step DuPont analysis shows in better detail that the drivers behind the ROE increase comes from an increase in operating margins and an increase in debt. If I were to decrease the equity multiplier from 2.98 down to 2010 levels of 2.3, the ROE goes down from 23.7% to 18.3%.
With the company still growing and investing cash for growth, using the standard DCF valuation is not the best idea. A better way to value FleetCor would be based on its income statement. Here is an EBIT multiple calculation assuming 20% revenue growth in the next year.
Based on this valuation, even by using the aggressive assumptions, FLT looks to be overpriced at this point.
A picture is worth a thousand words.
FleetCor has performed amazingly for shareholders since its IPO in December 2010, but rather than just jumping on board, I am watching this from the sidelines. The business is attractive but the price paid determines whether a stock is a good or bad investment. At current prices, I have to make aggressive valuations and assumptions but still it falls short of the desired valuation range. I will gladly put it up on my watchlist though.