You Missed Out on Visa and Mastercard. Then Keep an Eye on This One.


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Jae Jun

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Here’s an analysis of a company that I came across which I struggled to value at first. But as I continued to read and learn about the industry, it continued to raise my interest. Take a read and see whether this is an idea that can suit you at the right price.

Quick Summary

FleetCor is a company with a strong moat in an attractive industry and performing well for shareholders.

The company has more room for growth but some questions have to be asked as to whether this will make it a good investment.

What is FleetCor Technologies?

Having missed out on Visa and MasterCard, stumbling upon FleetCor is a pleasant surprise.

FleetCor Technologies is a company that provides fuel cards and payment products used by employees. They also have lodging cards, but since the overall concept is the same, I will focus most of the discussion on fuel cards.

The important thing to understand is that although I’ve included Visa and MasterCard into the conversation, fuel cards and credit cards are different in many ways.

First, what is a fuel card?

Differences Between Credit Card and Fuel Card

A fuel card, as the name suggests is mainly used for fuel.

Companies that require lots of travel in their line of work gain a lot of benefits with issuing fuel cards to their employees instead of standard credit cards.

Here are the pros and cons taken from wikipedia.

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
  • Increased security
  • Filling patterns can be customized by Smartchip technology
  • Fleet efficiency & MPG reporting
  • Reduced administration via management tools
  • 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)

The pros far outweigh the cons and should now provide a clear picture of the business model.

FleetCor’s Business Model is a Competitive Advantage

FleetCor has been around since 2000 and has grown mainly from acquiring smaller fleet card companies around the world.

The company does business in over 18 countries and such an extensive network of where its cards are accepted that it would literally take a decade to replicate anything in the same size and scale.

There is also switching cost involved in such a network. Once you have gas stations equipped with hardware and software to work for these type of fuel cards, it’s very difficult to switch.

It’s different to just accepting credit cards and performing transactions.

Based on the data that fuel cards track, the data provided to the system from every gas pump is much more than the average credit card transaction.

This is a Very Profitable Business

Visa and MasterCard are very profitable businesses. They receive a percentage in fees for every swipe.

Since I sell stock valuation tools on this site, I have to accept credit cards. So I understand how powerful this industry is in terms of profitability.

The fee per swipe racks up and I understand why little mom and pop shops don’t like to take Amex cards or why they make you spend at least $10 before you can use a credit card.

Actual numbers showing profitability can be seen below.

High Insider Ownership is a Good Sign

The CEO holds a 5.5% stake in the company of a current $6B company which is more than $300m.

Two members of the board are also part of Summit Partners which owns 28% of the company.

These insiders have a strong interest in the company and with key investors on the board of directors, it’s pretty clear intentions are aligned with shareholders.

There are Always Risks

The majority of FleetCor’s revenue is dependent on fuel prices. Since they receive a percentage of the sale, if fuel price drops, then the fee also decreases.

I don’t see this playing out though. As the government continues to bring in more regulation and stricter practices, the cost to refiners will go up which will get passed onto the customer at the pump.

Another big risk is from competition. If companies like Shell or BP really get aggressive and try to launch their own version of the fuel cards and prevent their gas stations from accepting FleetCor’s cards, it will be a huge blow.

But this is something that the management have always known about and although it’s been tried before, it has not succeeded.

The balance sheet is full of goodwill and intangibles from all the acquisitions. It makes up 51.1% of total assets and the debt to equity ratio is at 71%.

Fundamental Numbers

What better way to identify profitability than ROE and CROIC which is an improved version of ROIC.

Some numbers to bring it all together.

Strong returns for any business but let’s take it a step further. I have been using the DuPont method a lot to really dig into whether the ROE is organic or artificial.

The five step DuPont analysis shows in better detail that the drivers behind the ROE increase comes from an increase in operating margins and an increase in debt.

If I were to decrease the equity multiplier from 2.98 down to 2010 levels of 2.3, the ROE goes down from 23.7% to 18.3%.

Brief Valuation

With the company still growing and investing cash for growth, using the standard DCF valuation is not the best idea.

A better way to value FleetCor would be based on its income statement.

Here is an EBIT multiple calculation assuming 20% revenue growth in the next year.

Based on this valuation, even by using the aggressive assumptions, FLT looks to be overpriced at this point.

Overall Verdict

A picture is worth a thousand words.

Summary

FleetCor has performed amazingly for shareholders since its IPO in December 2010 but rather than just jumping on board, I am watching this from the sidelines.

The business is attractive but the price paid determines whether a stock is a good or bad investment.

At current prices, I have to make aggressive valuations and assumptions but still it falls short of the desired valuation range.

I will gladly put it up on my watchlist though.

Disclosure

None

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6 responses to “You Missed Out on Visa and Mastercard. Then Keep an Eye on This One.”

  1. Garrett says:

    Summit and Bain together sold 4.5 million shares (about 5% of the company) on March 6. Is this factored into the 28% figure you mentioned?

  2. This was based on the latest filing report. Not the latest insider information. They have been selling, I would too with the big run up it has encountered.

  3. Carl says:

    Jae,

    This is a good one and I will keep my eyes on it. Also Safeway recently spin-off Blackhawk Network Holdings Inc.and this company sells gift card from brands such as Amazon, Starbucks.

  4. Steven Davis says:

    Here’s an analysis of a company that I came across which I struggled to value at first. But as I continued to read and learn about the industry, it continued to raise my interest. Take a read and see whether this is an idea that can suit you at the right price.

    Shouldn’t this be the opposite? You first find what is exciting about the industry and then make a move? I mean it sounds like you found a company that you knew nothing about and then suddenly it came within your value criteria. I like to do the opposite. I like to find if an industry is within the “value criteria” first and go from there.

  5. Carol Shumate says:

    I almost bought shares in this one until I looked on http://www.glassdoor.com and read the terrible reviews Fleetcor’s employees posted there. They say that the company chooses profits over everything, including even the customers’ experience. Companies can get great numbers by squeezing employees and customers alike, but eventually that will bite them.

  6. good point. I look at glassdoor as well. I pay higher attention when it is a retail store where the employees are really involved with customer interaction.

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