WEX (NYSE:WEX) has been active on the dealmaking front late in 2020. The company has been a long-term value creator which has been operating a bit under the radar in recent years.
My last update on the company was nearly 7 years ago when the company acquired Evolution1 in the summer of 2014, in a deal valued at just over half a billion to diversify away from the core fleet business.
Trip Down Memory Lane
When WEX acquired Evolution 1 in 2014, I thought that the purchase of the cloud-based technology and payment solution provider for the healthcare industry made sense. Diversification from its core line of business was welcomed, while the company has quite a solid acquisition track record as the market for complex (healthcare) payments is quite compelling.
Given the $4.3 billion enterprise valuation at the time, the deal was important and was set to bolster revenues running at $777 million, while adjusted earnings were seen at $189 million. Based on the equity valuation of $4.0 billion, WEX traded at 5 times sales and 21 times adjusted earnings.
These were not low valuations for a business generating three-quarter of revenues from fleet cards being used at fuel stations, yet the company had quite a solid track record, having essentially quadrupled sales and earnings without too much dilution in the decade before.
The company was already moving away from merely fleet card to adjacent markets for travel, health and employees, using its quantitative analysis and shared data as core competencies. Its non-fleet business had grown to a quarter of sales by 2014, largely driven by dealmaking. Given the premium (remember valuations at the time) I decided to become a buyer around the $80 mark, if shares might see a 20% pullback.
What Happened?
After trading around the $100 mark for the remainder of 2014 and 2015, fueled by additional dealmaking like the $80 million acquisition of Benaissance and the more than $1.5 billion deal for Electronic Funds Source, shares slipped a bit in 2016.
This was in part driven by high oil prices and 2015 results not being that impressive with sales up just 5% to $855 million while earnings were stuck around $4.92 per share. Note that the big deal for Electronic Funds only closed halfway 2016 as the added debt and more moderate operating performance made some investors less enthusiastic. The 2016 results, which partially reflected the Electronic Funds deal, revealed revenues to be up 19% to $1.02 billion as adjusted earnings fell to $4.62 per share as some dilution kicked in, while net debt of $1.6 billion was sizable as well.
The 2017 results showed real improvements and deleveraging was accompanied by lower interest rates and expenses, pushing a recovery in the shares. Sales rose 23% to $1.25 billion following the deal as adjusted earnings rose to $5.41 per share. Late in 2018 shares already hit the $200 mark and traded around these levels (albeit accompanied by some volatility), that is up to the start of the pandemic early in 2020.
As the share price advances have been spectacular, WEX had grown to become a $1.72 billion business in 2019 which reported adjusted earnings of $9.20 per share for that year. With a roughly $9 billion equity value and more than $12 billion enterprise value, it is evident that the company took on some debt and valuations have risen. Increased valuations show that the company is valued at 7 times sales and shares at 21 times earnings, again in part aided by low interest rates. Furthermore, years of diversification efforts have reduced the revenue share from fleet solutions to 60%, accompanied by roughly two equally large healthcare and benefit and travel solutions segments.
To complicate things even more, the company announced a $1.7 billion purchase of eNett and Optal, both players in the travel industry, in January 2020. This announcement came just weeks ahead of the actual outbreak of the pandemic in the western world. The added debt and uncertainty around this deal pulled down the stock price from $230 to $80 in the weeks since the outbreak of the pandemic and the recovery of the shares lagged the market in a big way with shares trading at $120 as recently as October 2020.
First quarter sales still rose 13% year-over-year as in June the company received a vote of confidence thanks to a $400 million investment from Warburg Pincus. Second quarter sales fell 21% and earnings were cut in half, which resulted in rapidly increasing leverage ratios.
The irony is of course that the pandemic is essentially a breakthrough for digital payments, which the company is enabling. Third quarter sales declines narrowed to minus 17%. The sequential improvements in sales and earnings inspired confidence. Furthermore, the $1.7 billion deal for eNett and Optal closed in December at just a $577 million cash payment, making investors upbeat.
Full Steam Ahead
Despite some leverage already on the balance sheet and the business being hit by the pandemic, management has been active in dealmaking early in 2021. In February, the company announced a $200 million deal for certain health savings accounts from the HealthcareBank. This deal was followed by the 2020 results which were released a few days later, as fourth quarter sales declines improved to minus 9%. Full year sales fell 10% and adjusted earnings per share fell from $9.20 to $6.06 per share.
Despite leverage standing at 3.7 times by year-end of 2020, the company continues dealmaking with the HealthcareBank deal. The momentum and aggressiveness of management has made investors optimistic as well with shares trading at a high of $215 per share, equal to 23-24 times earnings reported in 2019. While 2020 is a lost year, dealmaking could set up the company for further earnings growth in 2021, and certainly in 2022, depending on the economic conditions.
The solid growth is good news as I like the diversification away from fleet solutions. That said, a small premium to the market and nearly 4 times leverage ratio make me a bit cautious as I recognize that shares have risen from $125 in October to $215 now, a $90 move in just a few months. That is a bit too much for my taste, and I have a neutral to cautious stance at these levels.
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