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  • FleetCor reported Q2 earnings and revenue that were mostly in line with expectations.
  • The company’s growth prospects still seem compelling, but the valuation seems to be near the end of expansion.
  • The rumored Comdata acquisition might be a near-term catalyst that might push the share price higher.

FleetCor (NYSE:FLT) reported Q2 earnings and revenue that were somewhat disappointing. The company almost always beats on both the top and bottom line, which was not the case this time. However, FleetCor did raise full-year guidance and the company's expected growth going forward is still compelling. On the other hand, the valuation might be getting ahead of itself and we might be near the end of P/E expansion. This does not mean that FleetCor is heading lower from here (although there are downside risks), as the company has room to grow into its valuation in the next couple of quarters, and I am raising my base case price target from $150 to $153, which implies 16% upside from the current price. If FleetCor continues to trade at its current valuation in the next six months, the upside is approximately 40%.

Q2 highlights

FleetCor's Q2 revenue increased 24% to $273.5 million, which was slightly below analyst estimates. Adjusted EPS rose 28% to $1.27. The company sees strong momentum in the business, except Russia. Organic growth was 9% in North America while international organic growth was slightly lower. Acquisitions accounted for the rest of the strong performance, with the biggest contributors coming from Brazil, U.K. and NexTraq, the company's telematics business in the U.S:

Revenue in Russia was up 4% over Q2 2013 in local currency, and management stated that there were no adverse effects because of sanctions or by changes in regulations by the Russian or U.S. governments. The company is indirectly affected by the softening of the Russian economy and is experiencing a slowdown in volumes. Russia is expected to continue to be a headwind for FleetCor's business going forward, but the company derives just 4% of total revenue from Russia, so the impact will not be felt on the top and bottom line in a major way.

The company raised full-year earnings guidance by $0.05 at mid-point to a range of $5.04 to $5.07. Revenue is now expected to be between $1,082 million and $1,097 million, up from the previous range of $1,075 million to $1,095 million.

Overall, the second quarter report was slightly worse than I expected, but the strength of the business model and the acquisitive nature of the company should keep the growth around or close to current levels in the next couple of years.

FleetCor might be near the end of P/E expansion

Estimates are bound to rise after the Q2 report and I am raising my price target from $150 to $153. The target is based on a 2014 P/E of 30 with EPS expectations at $5.10. This implies 18% upside from the current price. As for the downside, I previously expected that the downside should be limited to a 2014 P/E ratio of 20, which translates into 20% downside from here, meaning that the reward/risk ratio is roughly the same.

And if we take a look at FleetCor's P/E ratio chart, it is evident that the stock is struggling to attain a higher P/E ratio, which means that we are near the end of P/E expansion. I believe that the best case scenario for FleetCor is to keep its current valuation, which was the basis of my bull case price target of $193. Due to lower Q2 earnings and full-year guidance, I am revising my bull case price target to $185 to reflect the lower expectations for 2014 EPS. This implies approximately 40% upside from the current price. The main catalyst that might enable FleetCor to keep its current valuation in the next six to twelve months is its aggressive M&A behavior. The company is reportedly in talks to acquire Comdata, which is a major player in the fuel card space. Private equity firms including Carlyle Group and Silver Lake Partners are allegedly teaming up with FleetCor to acquire Comdata for more than $3 billion. The deal would represent one of FleetCor's largest and would expand the company's capabilities in electronic payment processing. The potential synergies from the deal and higher revenues and profits would enable FleetCor to retain its current valuation in the medium-term and provide more upside for its shareholders.



Although FleetCor might be near the end of its P/E expansion, there is still plenty of upside potential in the next couple of years. The upside in the next six months is between 18% and 40%, while the downside should be limited to a maximum of 20% and regarded as a strong buying opportunity. The potential acquisition of Comdata would likely have a positive effect on the share price and would elevate the probability for FleetCor to keep the expanded valuation in the medium-term.

Source: FleetCor: The End Of P/E Expansion?