Looking at profitability is a very important step in understanding a company. Profitability is essentially why the company exists and a key component in deciding whether to invest or to remain invested in a company. In this article I will look at FleetCor Technologies (NYSE:FLT) earnings and earnings growth, profit margins, profitability ratios and cash flow. In addition, I evaluate which institutional investors bought the stock in the recent quarters.
About the Business
FleetCor Technologies, Inc. Inc. provides fuel cards and workforce payment products and services to businesses, commercial fleets, oil companies, petroleum marketers, and government entities in North America, Latin America, and Europe.
The first step is analyzing FleetCor Technologies earnings growth. I am looking for companies that are able to grow both quarterly and annual earnings more than 15% a year. That growth could come either from new product introductions or a solid strategy of expansion into new markets.
The company generated 37% EPS growth last quarter compared to the same quarter in the past year. I always recommend to go for a minimum 15% quarterly EPS growth. FleetCor Technologies passes this first test. FLT earnings growth came from increased product adoption levels and production optimization which increased margins and growth levels.
It is important to highlight that analysts just upgraded its estimates for the current year, increasing projected EPS at 30%.
FleetCor Technologies also shows a 3 year annual growth rate of 31%. It is essential to evaluate the company´s EPS growth trend in the past year in order to get a clear perspective on how the company has been growing. I am encouraged to see a 3 year EPS growth rate stronger than 15% (minimum rate of growth I require for these kind of stocks).
Let's go to analyze FleetCor Technologies revenue growth. It is important that both EPS and sales grow at similar levels.
FLT generated 29% quarterly revenue growth compared to the same period last year. FLT generated strong quarterly growth levels. I am confident on FleetCor Technologies continued success in emerging economies.
I also look at how FleetCor Technologies grew earnings in the past 3 years. FLT generated 26% average 3 year annual sales growth. This is a very important metric that Investors Business Daily (IBD)-the best source for growth stocks ideas- pays attention to when analyzing high growth companies. FLT sales went up more than 15% (minimum growth I require) in the past 3 years, a very encouraging signal. I think that strong sales growth levels show that the company is doing well.
Gross Profit Margin Analysis (Gross Income / Sales)
The gross profit margin is a measurement of a company's manufacturing and distribution efficiency during the production process. The gross profit tells an investor the percentage of revenue/sales left after subtracting the cost of goods sold. A company that operates with higher profit margin than its competitors is more efficient. Investors tend to pay more for businesses that have higher efficiency ratings than their competitors, as these businesses should be able to make a decent profit as long as overhead costs are controlled (overhead refers to rent, utilities, etc.).
In reviewing FLT's gross margin over the past five years, an investors can see that the company's gross margin has been decreasing. In fact, the 5-year low for the gross margin was reported in 2008 with a margin of 72.6%. The 5-year high for the margin was in 2012 with a margin of 100.0 %. The 2012 gross profit margin of 75.4% is below the 5-year average of 76.5%. As the gross margin is below the 5-year average this implies that management has not been more efficient in improving this key profitability metric.
Operating Margin Analysis (Operating Income / Total Sales)
Operating margin is a measure of the proportion of a company's revenue that is left over after paying for variable costs of production, such as wages, raw materials, etc. A healthy operating margin is required for a company to be able to pay for its fixed costs such as interest on debt. If a company's margin is increasing, it is earning more per dollar of sales. The higher the margin, the better.
Over the past 5 years, the operating margin has been decreasing. For example, In 2008, the company reported an operating margin of 44.7%. In 2012 the company had a operating margin of 45.9%.
The 2012 operating margin of 45.9% is below the 5-year average of 47.5%. This implies that there has been less of a percentage of the total sales left over after paying for variable costs of production such as wages and raw materials compared to the 5-year average.
I always stress that it is essential to find companies with improving profit margins. While a declining margin does not prevent me from investing in FleetCor Technologies, I do not like the fact that its operating margins have declined.
Net Profit Margin Analysis (Net Income / Total Sales)
A ratio of profitability calculated as net income divided by revenue, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
Profit margin is very useful when comparing companies in similar industries. A higher profit margin indicates a more profitable company that has better control over its costs compared to its competitors. Profit margin is displayed as a percentage; a 20% profit margin, for example, means the company has a net income of $0.20 for each dollar of sales.
Over the past 5 years, FLT's net profit margin revealed a dip compared to the 5 year average. In 2012 the net profit margin of 30.56% is below the 5-year average of 32.02%.
As the 2012 net profit margin of 30.56% is below the 5-year average of 32.02%, this implies that there has been a decline in the percentage of earnings that the company is able to keep compared to the company's 5-year average.
I think it is important to look for stock with current net profit margins above the five year average margin. Basically, almost all my stock market winners were companies with above than average margins.
ROA - Return on Assets = Net Income / Total Assets
ROA is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient management is at using its assets to generate earnings. Calculated by dividing a company's net income by its total assets, ROA is displayed as a percentage. Sometimes this is referred to as "return on investment."
The 2012 ROA of 8.57% is slightly above the 5-year average of 9.33%.
As the 201S ROA of 8.57% is above the 5-year average of 9.33%, this implies that management has had the ability to use the company's assets to generate earnings compared to its 5-year average.
The 2012 ROA of FleetCor Technologies 8.57% is slightly below the 5-year average of 9.33%.
As the 2012 ROA of 8.57% is below the 5-year average of 9.33%, this implies that management has reduced its ability to use the company's assets to generate earnings compared to its 5-year average.
ROE - Return on Equity = Net Income / Shareholders' Equity
As shareholders' equity is measured as a firm's total assets minus its total liabilities, ROE reveals the amount of net income returned as a percentage of shareholders' equity. The return on equity measures a company's profitability by revealing how much profit it generates with the amount shareholders have invested.
Free Cash Flow = Operating Cash Flow - Capital Expenditure
A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (NYSE:FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Free cash flow is important because it allows a company to pursue opportunities that enhance shareholder value. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt.
FleetCor Technologies generated a ratio of cash flow from operations/total sales of 16.44. The higher the percentage, the more cash available from sales. If a company is generating a negative cash flow, it shows up as a negative number in the numerator in the cash flow margin equation. This means that even as the company is generating sales revenue, it is losing money.
I also evaluate recent institutional activity in the stock. In other words, I want to know which hedge funds bought the stock in the recent quarters. I feel encouraged that Steve Mandel and Paul Tudor Jones bought the stock in the past months at an average price of $81.23. This shows that hedge funds have confidence in the stock.
Currently, many analysts have a good outlook for FleetCor Technologies. Over the next few years analysts at MSN money are predicting FleetCor Technologies to have an EPS of $3.90 for FY 2013 and an EPS of $4.52 for FY 2014. Analysts at Bloomberg are estimating FleetCor Technologies's revenue to be at $852.50M million for FY 2013 and $968.16M million for FY 2014. In 2/08/2013, Barclays gave FleetCor Technologies a rating of "Overweight" with a target price of $115.00. A $115.00 price target signifies attractive upside potential from this point.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in FLT over 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.