FleetCor Technologies (FLT) was the stock to own in 2013. It rose 118%, as opposed to S&P 500's rise of 32%. Its business and valuation can be compared to credit card giants Visa (V) and MasterCard (MA), and I believe that FleetCor is a better investment than Visa and MasterCard. While their valuations are roughly the same, FleetCor's revenue and earnings growth are almost as twice as Visa's and MasterCard's. However, valuations are stretched at the moment, and I believe that there will be a more favorable entry during 2014.
FleetCor Technologies is a leading independent global provider of specialized payment products and services including fleet cards, food cards, corporate lodging discount cards and other specialized payment services for businesses throughout the world. The company serves over 500,000 commercial accounts with millions of cardholders across the United States, Canada, Mexico, Europe, Africa and Asia.
FleetCor is benefiting from a global shift away from cash to credit and debit cards, like its peers Visa and MasterCard. The company has delivered robust growth rates since going public in December 2010.
FleetCor has grown organically and through acquisitions. The company acquired over 60 companies, and has expanded into new geographies along the way. It is now focusing on expanding into emerging markets, especially BRIC countries. In the first nine months of 2013, 49% of revenue was outside of U.S. and expected to rise further in the future. The company's aggressive expansion strategy has resulted in 29% compound revenue growth from 2003 to 2012, and 41% adjusted net income growth.
Source: FleetCor investor presentation
Why choose FleetCor over Visa and MasterCard?
FleetCor rose 326% since going public, while MasterCard and Visa rose 234% and 187% respectively in the same time frame. While past results are not indicative of future returns, I believe that FleetCor is a better investment than both MasterCard and Visa. FleetCor currently trades at a slight premium over Visa and MasterCard, but when you compare the growth levels, the premium should be even higher, since FleetCor's revenue and earnings growth rates are much higher than Visa's and MasterCards'. A look at the table below paints a clear picture.
However, all three stocks are trading at much higher multiples than just a year ago. Visa and MasterCard traded at these EV/EBITDA levels when they were growing much faster than they are today. This means that the market is expecting a significant improvement in the world economy and in the growth rates of FleetCor, Visa and MasterCard. The flip side is that their prices will either stagnate or fall to get down to their earlier multiples (assuming the expected growth stays the same). I believe that the latter is more realistic going forward. I also think that FleetCor will find it easier to justify its current valuation when its earnings and revenue growth are put into perspective.
Price performance and outlook
FleetCor's share price is consolidating after strong gains in 2013, while Visa and MasterCard went higher in the last couple of weeks, and are extended and vulnerable to a pullback. I believe that there will be a better buying opportunity in the next couple of months, and would not buy Visa and MasterCard at current price levels. On the other hand, I believe that FleetCor's downside is limited to $110, or slightly lower. The company is slated to report earnings in early February, and this may present a catalyst for the share price to rise from this short-term consolidation.
I believe that FleetCor Technologies is a better investment than Visa and MasterCard at current price levels. FleetCor's growth and valuation are more favorable, and the company is still in its early stage of expansion. Its stronger growth will also enable the company to weather the higher valuation the market has assigned in the last couple of months. As for Visa and MasterCard, I would not buy them here, as I believe that there will be a better buying opportunity in the coming months.