WEX: Losing The Relative Game To FleetCor

| About: WEX Inc. (WEX)

Summary

Consolidation in the space, diversification of revenue sources and cash flows have helped the name for a while, but the headwinds are gaining strength.

Given weak oil prices and integration risks from the recent acquisition, a wait and watch approach might be apt.

High leverage may limit the company’s ability to make acquisitions in the near term.

WEX Inc. (WEX) is trading at a significant discount to its fleet card peer FleetCor Tech. (NYSE:FLT) and there is a growing discussion about the opportunity for the company to catch up or even command a premium over peers, but looking at the fundamentals, the possibility looks rather remote. Indeed, on the contrary, with a relatively weaker balance sheet that may make further acquisitions difficult, and weak fuel prices, the absence of an equally strong fee income and uncertainty born out of the recent EFS (Electronic Funds Source) acquisition, the challenges for WEX seem high, making it difficult for the name to close the 'best of breed' premium currently enjoyed by FleetCor.

From a macro industry standpoint, one can argue that some of the tailwinds enjoyed by most players in the space seem to be easing out. The fuel prices are weak again, which may lead to fuel price volatility and lower earnings visibility, and the trucking industry that was benefiting from an economic comeback post-financial crisis may also find it difficult to maintain the current momentum. The digitalization of fleet monitoring, fuel-buying decisions, sending cash advances to drivers and other transactions needed for fleet management continues to gain acceptance, just as questions over the relevance about the fleet cards are starting to find a voice.

Oil impact

Given fuel-card firms get a cut on sales when customers swipe their cards at the pump, an inflationary environment is a favorable development in general. Fuel card firms generate revenue from their payments network and card processing services for fleets, charging fleet operators for the fuel cards and fees from gasoline companies that take the fuel cards. Since wholesale prices, compared to retail prices, move faster to align with oil prices, there exists a spread between the wholesale price of fuel and the retail price. The heightened volatility may allow the business to benefit from the price spreads in the short-term, but over a longer period, lower prices may only shrink the spread. Indeed, on a full year basis, a 10 cents change in average domestic fuel prices is expected to increase or decrease revenue by approximately $12 million for the company. Worth noting that most of the company's fuel hedges expired in the first quarter and the company, till the end of last quarter, was waiting for further price increases to go for hedges.

Growing uncertainty

No doubt, the EFS acquisition should help WEX improve its OTR (Over the Road) platform capabilities, including fuel price analytics, mobile account maintenance, etc., the virtual business EFS's electronic accounts payable offering and help diversify some of the fuel price sensitivity, but the process of integrating a business of such scale is bound to occupy management's time and create uncertainty for investors.

The softness in same store sales, which was down 4% in the most recent quarter after a weak performance during the first quarter, is visible and the weakness in large fleets and the oil and gas industry is continuing. The Travel & Corp. business, almost 23% of the total revenue and a major growth driver, may face increasing pressure as the business expands globally, especially from non-bank models in serving smaller travel providers.

The balance sheet may allow limited room for making acquisitions in the near future, given the leverage of close to 4.7 times and the company's goal of close to 2-3 times. As for using stock as a currency for acquisitions, other players in the broader payment processing space, i.e. players like Vantiv (NYSE:VNTV), Alliance Data (NYSE:ADS), Global Payments (NYSE:GPN), MasterCard (NYSE:MA) and Visa (NYSE:V), may have an advantage, at least looking at the valuation.

Comps

EV/ EBITDA (trailing)

EV/Revenue

P/Book

WEX

16

5.2

3.2

FLT

19

9.7

4.7

VNTV

15

3.4

6.2

GPN

25

5.3

4.2

ADS

20

4.6

7.9

MA

18

10.0

17.9

V

20

13.3

6.8

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.