FleetCor Technologies (FLT): Group valuation exercise?

  • JaeJunJaeJun
    Posts: 2,491
    Here is a company that I'm struggling to value.
    Provide your assumptions and valuation to show how much you think this company is worth.
    Dont be shy. I'm here saying I don't know how to value the company so any response is welcome.

    FleetCor Technologies (FLT)

    FleetCor Technologies, Inc., is an independent global provider of fuel cards and workforce payment products and services to businesses, commercial fleets, major oil companies, petroleum marketers and government entities in countries throughout North America, Latin America and Europe. It provides its payment products and services in a variety of combinations to create customized payment solutions for its customers and partners.

    What assumptions would you use to value the stock? Or is this too broad?


  • 7 Comments sorted by
  • somrhsomrh
    Posts: 984
    The first observation is the total amount of goodwill which has increased year since they've been public. And they've stated in their 10-K that they intend to continue to expand via acquisition.

    So I'd want to figure out how to separate "organic" growth versus "acquisition" growth and discount if appropriate (how? I'm not sure exactly). At the very least, I'd want to see how much they're paying for those acquisitions.

    I guess one way to look at this is adjusted EBIT to assets.

    I took (EBIT - Total Other Expense) x (1-35%) and got about $202M. That puts EBIT(adj)/Assets around 7.4%. I'm not sure if that's adequate.

    That "Total other expense" is something I couldn't find any info on. It represents around 5% of EBIT so it's not irrelevant. That's just more or less a curiosity.

    I'm not sure how I'd value it. I certainly wouldn't be slapping on the multiple the market is currently slapping on it. Perhaps it's a good short candidate? *shrug*
  • JaeJunJaeJun
    Posts: 2,491
    Good start. I checked up ValueInvestorsClub and found this write up.
    Not bad. Im very interested in this business. Looks very interesting. Price not so much.
    Either way, attached a file. I'll have to work on writing something about this.
    valueinvestorsclub.com-FLT-20121113.pdf
    43K
  • GammastyleGammastyle
    Posts: 210

    Basically, they make sure your workers are not stealing from the company.  A noble endeavor.  If I understand what they do, the customer pays FLT cash and they then issue a bunch of cards to the customer that have a fixed amount on them.  The workers can then use those cards to pay for gas, hotels etc while on the road.  The value proposition is that the company's travel expenses will be reduced by eliminating "goosed up" expense reports.  For this, they get a markup on the cards I'm assuming or a fee for managing the process.


    It is a good business and one that will have a market as long as humans are humans.


    However, I don't see an economic moat.  Almost any bank could get into this as the key factor is being able to handle a large number of transactions.  Everything happens electronically so there is no large fixed cost moat.  Thier fixed assets are tiny so any financial institution could come in and do this.  Also, there are a ton of expense report companies out there that could very easily institute this practice as well.  Thier margins will eventually be squeezed. 


    I can see them being acquired by a bank to integrate this into thier business. 


    Growth has been really good lately.  However, this has to abate as more entrants into the market shrink margins and eat at the customer base.  Also, prepaid money is cheap now for thier customers.  If interest rates rise, companies may not be as willing to part with the cash up front.  They would also get hit on the back end with thier borrowing.  Thier receiveables may be stretched as well.  This is even more important in a financial institution.


    They have been in the 20% for growth over the last few years.  I can't see that going on for much longer than the next 4 or 5 and then it goes to a more normal growth rate.  ROE is in the 17% range over the last couple years as well.  If the growth isn't there in years 5-20, I'd go with a growth rate of 12% as a normalized growth rate over the next 20 years.  It will be higher in the first couple years, then it will drop.


    As for discount rate, I give banks and other financial institutions a much higher discount rate than other companies.  They seem to be much more volitile and sensitive to any little shock.  These guys are a finanical institution.  Interest rates will rise and that will have an adverse effect on thier business.  If you strip out goodwill and intangibles, thier long term debt is way off line with thier long term assets.  I don't like that. 


    So I need 18% for this given the volatility and financing risks and lack of barriers to entry. 


    My starting point would be $109M for FCF or OE.  That's Income + Depreciation + other non-cash items - Cap Ex - Acquisitions.


    I throw acquisitions in there because growth seem happen in a direct correlation to thier aquistions.  They are buying growth which we have in our growth number, but they have to spend the cash to get that growth. 


    Throw it in the pot, stir it up and I get fair value of $17.05 or this things is overvalued by 4.5 times. 


    This is a valuation based upon a 20 minute look at the company so I may have missed a little (or a lot).

  • GammastyleGammastyle
    Posts: 210

    @JaeJun


    I just read that report and I'm a little more open on the growth prospects, but I disagree with his notion that there are high barriers to entry.  His arguement is that it takes time to build the network of customers/businesses, but the large banks already have these relationships.  However, stating that Visa and Mastercard already tried this gave me pause.  They were two I was thinking about getting into this primarily. 


    I'm still don't see the same growth as prior periods going on for very long.  Any great success they have is going to attract the sharks and they don't have much shark repellant. 

  • JaeJunJaeJun
    Posts: 2,491
    I did some reading on fleet cards and its much different to a normal card it seems.

    They can use it for fuel and that's about it. Their fixed cost is low, they get paid a fee % of the total amount spent and there was some mention of a "spread". Have to read up on that a little more.

    I do agree with the network effect though. Trying get every gas station to accept your card is quite difficult and will be even more difficult to remove once in there.

    Companies that use their cards are also going to face switching costs. So many cards and accounts to replace. I can only imagine the headache.

    Lots of growth internationally and it's a great business model. Recurring revenues, majority of revenue coming from fees and charges. Reminds me of V and M which is why I'm trying to learn more about it.

    They have issued shares in a secondary offering. Maybe they will do it again to fuel growth..

    Interesting company none the less.
  • somrhsomrh
    Posts: 984
    There will probably be more stock offerings. They're planning on growth through acquisition. Unless they can earn enough cash flows to grow...

    But I'd still be reluctant to pay for growth on this one as I'd want to know how much they're growing organically and also what kind of returns they're getting from their acquisitions.

    I still don't fully understand what it is they offer that a credit card couldn't though. It sounds like a charge card that's got incentives designed for those in the shipping industry. I guess I have some of @gammastyle 's reservations there.

    Here's a question. Do fueling stations give discounts as part of the package to draw their business? That might make it a little more difficult for the credit companies to move in on this one.
  • JaeJunJaeJun
    Posts: 2,491
    With regards to discounts, yes. Since most of the businesses that use it are logistic companies, they get to purchase fuel at near wholesale price which is a big cost saving.

    Here's a really good breakdown of the difference between a fuel card and credit card.
    Shame that there is no bigger pureplay competitor to FLT public traded.

    Fuel and credit card comparison

    There are many reasons for/against the use of a fuel card over a credit card, which are outlined below:

    Pros:

    • Discount fuel prices (i.e. wholesale prices)
    • Ability to choose from multiple providers like Shell, Esso, Keyfuels, Texaco etc. This enables better pricing due to competition.
    • Need for carrying cash (or giving cash to drivers) eliminated
    • Prevention of fraud
    • Invoicing with VAT (tax) shown separately facilities tax recovery for businesses
    • Increased security
    • Filling patterns can be customised by Smartchip technology
    • Fleet efficiency & MPG reporting
    • Reduced administration via management tools
    • Points/reward schemes
    • Ability with some card management tools to capture private/business driver mileage split

    Cons:

    • Card stopping/cancellation periods can sometimes be longer
    • Greater liability for fraudulent transactions often placed on customer
    • Credit periods typically shorter
    • Retail cards typically offer pump prices (usually higher than wholesale) and occasionally additional surcharge
    • Annual or monthly card provision charge sometimes applied (usually bunkered)

    Neither:

    • Typically, bunkered cards can only be at service stations on the network it is associated with:
    Pro - could potentially restrict theft Con - site locations less readily available
    • Bunkered cards sometimes run on advance payment (e.g. stock holding/bunkering):
    Pro - buying in bulk potentially provides further savings Con - cash sum must be provided on regular basis

    [edit]Misconceptions

    Although fuel cards effectively 'look' like credit cards and use very similar technology, their use and implementation is significantly dissimilar enough to differentiate them as an alternate payment method. The main differences from credit cards are:

    • Payment terms often shorter
    • No rolling-balance is cleared (or partially cleared) each month
    • Transactions can be customised allowing only certain grades of fuel e.g. petrol, petrol & diesel, petrol & gas oil, etc.
    • Fuelling transaction limits can be applied using Smartchip technology
    • Liability for fraudulent transactions usually remains with user (depending upon agreement with card provider)
    • Card 'hotlists' (a.k.a. 'authorisation' or 'onstop' lists) received via different providers
    • Interim period after stop/hotlist request and card denied at fuelling station can be longer (although Online Authorisation networks are increasing)
    • Payment terminals separate to those used for credit/debit cards (bunkered cards only)
    • Fuel not technically paid at point of sale - simply allocated on account for payment at later date (bunkered only)
    • Some cards allow the purchase of such non-fuel products as lubricants and Adblue

    [edit]Security

    Depending upon the individual fuel card and the supplier, security benefits of fuel cards can include:

    • cashless transactions
    • chip-and-PIN protection
    • detailed invoicing – fully itemising transactions for individual cards
    • on-line account administration to stop cards 24/7
    • transactions restricted to fuel-related products
    • reporting of unusual transactions
    • decrease in occurrences of credit card 'skimming'


    Post edited by JaeJun at 2013-03-29 13:50:28

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