FleetCor: Why Acquisition Of FleetCor Could Be The Next Big Thing In Payments
Summary
- Potential buyers of Fleetcor's business could include Visa, MasterCard, or American Express.
- Fleetcor has a strong recurring revenue model, which strongly differentiates it among other co-branded companies.
- Valuation is not cheap, but we believe that longer term a potential deal could be highly synergistic.
Basic Business:
Fleetcor is a global provider of workforce payment products, offering fuel card payment solutions in both North American and international markets. Fleetcor also offers lodging, corporate payment, toll products, and gift cards, among other solutions. In addition, the company provides fleet-related and workforce payment products, such as employment benefits and mobile telematics. Fleetcor operates a close-loop network that allows customers (e.g., truck drivers) to take advantage of co-branded cards that give them special discounts on the price of gas, as well as on relevant car-related products at gas stations and convenience stores. Further, the company engages in issuing and processing data, enabling routing, authorization, and settlement of transactions. Fleetcor largely earns its revenue on a per transaction basis, particularly for credit cards and gift cards. Overall, Fleetcor’s annual revenue base is around $2.8 billion and its market cap is approximately $26 billion.
Valuation
When we compare Fleetcor against its peers in the payments industry, such as GPN, ADS, FISV, and FIS, we continue to estimate that FLT merits a P/E multiple of 27x (up from 26x) on 2020 earnings. When we apply this multiple to our 2020 revised EPS estimate of $12.80 (up from $12.75), we reach a target price of $346 (up from $331).
Why Acquisition of Fleetcor Makes Sense:
Potential Buyers: First things first: we have to identify potential buyers. Since we are talking about a $26 billion market cap company, the buyers have to come from the large cap conglomerate on the payments side, namely Visa, MasterCard, or American Express. They have the capabilities and they have prospective synergies. Most importantly, none of those three did a mega deal in a long time. In our view, co-branded card networks would greatly diversify the platform of any of these three mega-networks, while at the same time FLT's business itself has a lot of relevance to them. Those same reasons that over the years have propelled Fleetcor toward "tangential" acquisitions could be driving Visa, MasterCard, or American Express. This conclusion is solely ours; we are not commenting on any media chatter or speculation.
Diversity of Fleetcor's Businesses: Fleetcor is unique in the sense that it has its core business (co-branded fuel business), as well as a number of tangential segments, such as lodging, gift cards, and others. These are all profitable businesses with, on average, double-digit top-line growth, so we don't see any deadweight segments, should FLT be acquired. On the contrary, we see a diversified platform that has been built, ironically, via aggressive M&A strategy, when the company channeled as much as $1-3 billion annually toward acquisitions.
Strong Recurring Revenue Model: Between 75% and 85% of FLT's revenue base is recurring from quarter to quarter, which is a fairly rare phenomenon in the co-branded space and increases the company's attractiveness in the eyes of potential acquirers.
Solid Free Cash Flow Generation: With FLT free cash flows to EBITDA among the highest in the industry, we believe that Fleetcor could become one of the most successful segments for any mega payments company.
Valuation is Not Cheap: True, valuation is not cheap, since our multiple of 27x (see above) is higher than the 18-22x average for a payments industry. At the same time, we always maintained that it's a fallacy to look out for stock bargains, because if the business is truly performing well - this long-term investment will eventually pay for itself, even if some premium is based in the acquisitions price. At the end of the day, most successful deals take place when the market is on the rise, rather than during market corrections or recessions.
Risks to Our Thesis:
We see the following four core risks to our thesis.
1) Oil Prices Drop:
This is the most obvious risk that comes to mind when people analyze Fleetcor. However, it is important to reiterate that only less than 20% of the company’s revenues rely on oil prices.
2) Pricing Wars:
We believe that FLT may face pricing competition from some European providers. Thus far, it has been relatively immune to such pressures in the United States, but as other companies make inroads into this lucrative co-branded market, Fleetcor may face a difficult choice of lowering prices.
3) Rising Wages:
With the US job market enjoying the lowest unemployment rate since the 1960’s, there has been intense upward pressure on wages in recent months, a pattern whose costs may ultimately unfavorably impact the P&L.
4) Deadweight of Non-Core Businesses:
The company’s core fleet business has been doing extremely well over the years, prompting Fleetcor to diversify its portfolio via a number of non-core acquisitions. The results have been mixed at best. We fear that some of the company’s recent businesses, particularly on non-payments side, may eventually prove to be a deadweight for its P&L.
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