Description

We are long FLT and believe this a compelling entry point for longer-term focused investors with FLT trading at just 12.5x 2023 P/E and a nearly 9% 2023E FCF yield.  The company has experienced significant multiple contraction over the last year and a half as it has been grouped in with legacy merchant acquirers and other payment companies that are facing a much higher risk of technology disruption.  FLT shares have started to recover YTD (up 17%) but still trade well below the historical average valuation and near the company’s trough valuation.  The current valuation is highly attractive for a business and management team with a long-term track record of HSD to LDD organic revenue growth and a ~18% EPS CAGR over the last decade.  FCF conversion has also exceeded 100% over the last ten years with annual FCF of over $1 bil. and EBITDA margins are over 50%.  

FLT is a leader in B2B payments and is well positioned to benefit from the conversion of paper based payments to digital.  The business model is highly recurring, exhibits client revenue retention of over 92%, and is highly profitable.  FLT is led by a highly capable management team with an excellent track record of long-term capital allocation, including ~90 acquisitions of varying size.  CEO Ron Clarke has created a substantial amount of shareholder value during his tenure.  We like that he has an owner/operator mindset with a ~5% ownership stake in FLT.  In addition, management returns capital to shareholders and has taken advantage of the share price weakness to repurchase $2.7 bil. of FLT shares over the last two years while keeping net debt to EBITDA at a reasonable level of 2.6x as of Q3 2022.    

FLT businesses include Fuel (40% of 2022E revenue), Corporate Payments (23%), Lodging (15%), Tolls (11%), Gift (6%), and other (7%).  While each category is unique in its customer base and product offering, they also share a number of characteristics: customers are primarily businesses, have recurring/predictable revenue models, have specialized networks which create barriers to entry, and have similar selling systems.  We believe that the company has strong market positions across most of its key end markets and importantly, FLT helps its customers to save money and become more efficient.  For example, in the Fuel business, FLT helps its customers save money by leveraging FLT’s purchasing scale and utilizing a closed loop system that removes third party costs.  Additionally, customers also benefit from additional data that can help them drive greater efficiency across their business.  Across all of its businesses, FLT believes that the total addressable market is $125 trillion vs. FLT’s controlled spend of $250 bil.  See below for a full description of all FLT businesses.    

Cross selling has been a key focus area for the company (Beyond Fuel initiative) and has started to become accretive to growth.  The core fuel card business has laid the foundation for expansion into adjacent B2B businesses by providing the distribution (client base and salesforce) and cash flow to further penetrate the other sizeable B2B payment markets.  Management has indicated that the revenue per cross-selling customer could be 50% to 100% higher relative to a stand-alone customer.  Cross selling has been a tailwind for the corporate payments business, which is FLT’s fastest growing business (17% organic revenue growth in 2021 and 19% in 2022 YTD).  In corporate payments, FLT is the largest virtual card issuer globally and has over 1 mil. suppliers on its acceptance network.  The market opportunity is large with 50% of B2B payments still made in cash.  Robust growth in Corporate Payments as well as lodging should help FLT reduce its exposure to the fuel business, which has inherent volatility related to its exposure to fuel prices.  Reducing the fuel mix of the business should lead to a higher valuation for the company. 

Company Overview 

FLT operates through six revenue segments: Fuel (40% of 2022E revenue), Corporate Payments (23%), Lodging (15%), Tolls (11%), Gift (6%), and other (7%).  By geography, 68% of revenue is from the U.S., 13% from Brazil, 11% from the U.K. and 13% from other international countries.  The company has been highly acquisitive with 90 acquisitions since its founding in 2000.  

Fuel

FLT provides fuel solutions to businesses and government entities who operate vehicle fleets.  The business mix is ~60% domestic and 40% international.   The company has agreements with over 55,000 gas stations which accept FleetCor’s proprietary cards.  FLT’s solutions help businesses monitor and control fuel spend while also providing important analytics to customers.  Fuel revenue is derived from program-related fees, which include transaction fees, network fees, card fees and interchange.  The Fuel business revenue drivers are fuel spread prices (~10-12%), interchange (~30-35%), fees (~40%) and accounting servicing or program fees (~15%).  FLT delivers savings for its customers by using its scale to negotiate lower prices for fuel purchases than the retail price.  The company then benefits from the difference, less commissions paid to merchants and discounts passed onto customers when it is operating a spread basis.  Merchants partner with FLT because it drives higher volume to locations while customers receive a discount to retail fuel prices.  When customers use FLT’s proprietary card networks (Fuelman, Comdata, Allstar, CTF etc.) FLT can directly bypass Visa and Mastercard’s networks.  Generally, higher fuel prices are beneficial to FLT’s fuel revenue.

Corporate Payments 

Corporate Payments solutions are designed to help businesses streamline back-office operations associated with multiple areas of a company’s spending including payroll, accounts payable and cross border payments.  FLT’s products help companies save time, reduce overhead expenses and manage B2B payment processing more efficiently.  The company’s suite of Corporate Payment solutions includes accounts payable (AP) automation, virtual cards, cross-border, and purchasing and T&E cards.  The company generates more than half of its revenue from interchange, while the remainder is related to fees and the FX spread on cross border payments.  The Comdata virtual card (check replacement solution) runs solely on MasterCard’s network, and payment flows are integrated with FleetCor customers’ internal systems.  The virtual card is denoted for a specific amount and can be used only one time and when the payment is made, full remittance data accompanies each payment, which makes the product superior to ACH for reconciliation purposes.  The value proposition for corporate buyers is the significantly lower cost relative to checks (savings of up to ~$5 per check) while suppliers also benefit from easier reconciliation relative to ACH payments.  FLT also offers accounts payable automation tools, which help companies outsource their AP process, reduce strain on accounting departments and improve the customer’s data.  Several of FLT’s partners including Bill.com and AvidXchange are growing rapidly, which is helping to drive Corporate Payments’ growth.  

Tolls 

The company’s toll-related operations are Brazil based via FleetCor’s acquisition of Sem Perar.  FleetCor is the leading electronic toll payments provider in the country, as Sem Perar processes for over 6 mil. tag holders in Brazil.  Tags can also be used at over 4,100 merchant locations to purchase other services such as parking, fuel, car washes and meals.  FLT provides convenience and faster travel for customers, while also reducing manual labor and cash handling at toll booths.  Revenue is derived from fixed fees for access to its network and other ancillary services as well as interchange on certain services. 

Lodging 

FLT offers lodging solutions to businesses that have employees who corporate travels and to insurance policyholders displaced from their homes.  The value proposition is the FLT provides access to deeply discounted hotel networks and FLT leverages its scale to negotiate lower nightly rates.  In addition, FLT uses proprietary data management and payment processing systems to manage customer billings and reports.  Revenue is based on the number of transactions (hotel room nights purchased by a customer) and the company earns revenue from the difference between the amount charged to the customer and the amount paid to the hotel for a given transaction.  FLT has large lodging partners such as Marriott, Wyndham and Hilton in its network (over 15,000 hotels in the network).  Lodging is also a high growth area that is benefitting from a recovery in corporate travel from depressed levels during the pandemic.  FLT delivered 28% lodging organic revenue growth in Q3 2022.  

Gift 

FLT provides fully integrated gift card program management and processing services to retailers in 60 countries, in both plastic and digital form.  Revenue is earned based on the processing of gift card transactions sold by customers to end users, as well as from the sale of the plastic cards. 

Other 

Additionally, FLT generates revenue from other services including fleet maintenance, is centered in the UK (and to a lesser extent Europe and Australia), Employee Benefit Payments in Mexico and Brazil and payroll cards.  Additionally, FLT has its own proprietary debit network with 49,000 food locations and 12,000 fueling sites. 

Financials & Valuation 

FLT trades at an attractive relative valuation to the legacy merchant acquirers and we believe its business model faces less risk of technology disruption.  The company also returns its strong FCF to shareholders through sizeable repurchases while also engaging in M&A.   

On its third quarter 2022 conference call, FLT provided an initial for 10% 2023 organic revenue growth, avg. fuel price of ~$4.37, 200 bps to 300 bps of margin expansion and EPS of at least $17.  Over the long-term, FLT should be able to deliver organic revenue growth in the HSD to LDD range and EPS growth of 15% to 20%.      

Risks 

Revenue is impacted by retail fuel prices and fuel price spreads.

In 2021, ~12% of revenue was impacted by the absolute price of fuel and ~5% of revenue was related to transactions in which FLT’s revenue is tied to fuel price spreads.  The discount revenue portion will benefit when fuel prices increase and will be negatively affected when fuel prices go down.  The spread portion, in which FLT earns a spread on the difference between wholesale and retail fuel prices, typically moves in the opposite direction of fuel, providing a partial hedge.  FLT does not hedge fuel prices and these factors can lead to some volatility in its results.       

FLT has some modest credit risk with its customers. 

The company’s payments products are (1) prepaid cards in which purchases are debited against the preloaded balance, or (2) as a charge card where FLT will bill its customers at the end of period for the incurred charges.  FLT does carry some credit risk, but the company’s risk mitigation procedures (customer screening and credit limits) and vetting procedures help to limit the risk.  2021 bad debt expense was just 3 bps of total gross billings.  

FTC lawsuit could lead to penalties or changes in business practices.  

FLT’s fuel advertising and marketing practices have been subject to an ongoing FTC investigation since 2017 and a lawsuit since 2019 related to charging late and finance fees to customers in its North American direct fuel business.  The company has made changes to its practices and does not believe that this matter will be disruptive to the business or material to its financials.  FLT notes that it has we collected affirmative consent from 96% of its fuel card client base to the specific terms of their card program.  The targeted fees likely account for ~5% of total revenue even a worst case scenario in which these fees are eliminated (which is unlikely), the impact on FLT would likely be a manageable.        

EVs could be a headwind for FLT but the company has taken action to position itself to participate in this nascent market. 

Customers with EV’s will likely also maintain mixed fleets and will need FLT’s solutions to help manage the complexity of the fleet.  In addition, FLT should be able to participate in EVs through payments at charging stations on the road and companies will still likely need the spend control features FLT offers its customers, and possibly discounts depending on how the market develops.  FLT has added public acceptance networks for EV - public charge points or recharge points — both in the U.S. and in Europe.  The company also acquired Plugsurfing, an EV charging network & software solutions provider in Europe.  In addition, the company has invested in EV software companies that facilitate at-home recharging and reimbursement.  Overall, FLT participation in the EV ecosystem should help to mitigate any pressure on fuel volumes over the longer-term.

Catalyst

Cross selling success 

Return of capital to shareholders 

Resolution of FTC issue