Description

WEX is a high-quality payments name that is both misunderstood and under-covered. It currently trades at only 12.5x P/E, a -30% discount to its historical valuation and a compelling price for a business that grows earnings in the high-teens.

Capitalization & Trading

Business Background

WEX is a $9bn market cap payments company with three segments:

1. Mobility (~50% of 2024E EBITDA): WEX sells fleet cards that are used to refuel commercial vehicles. About 1/3 of the business is over-the-road trucking and the remainder is Class 1-7 commercial vehicles. Volumes are processed through a closed loop network whereby WEX negotiates with both the merchants and the fleets, creating network effects. WEX operates in a stable duopoly with leading peer FleetCor, where each has had roughly half of the market for the past two decades. Mobility grows its topline at 4-8% annually driven by share gains from non-fuel cards, increased uptake of technology add-ons, and price increases.
2. Corporate Payments (~25% of 2024E EBITDA): WEX operates as a virtual card issuer that makes B2B payments on behalf of corporate clients. It has a dominant niche in making B2B payments on behalf of Online Travel Agents to suppliers (primarily hotels). Pro forma for the 2020 acquisition of Enett, WEX has >80% market share in the OTA space. Corporate Payments grows its topline at 10-15% annually driven by increased uptake of electronic payments and inflation.
3. Benefits (~25% of 2024 EBITDA): WEX is one of the largest technology administrators of consumer-funded benefits, including HSA’s, FSA’s, and HRA’s. WEX hosts the technology platform used to select plans, processes payments, and earns interest on balances held in consumer accounts. In this business, WEX enjoys recurring revenues and ~30% market share. Benefits grows its topline at 15-20% annually driven by increased penetration of consumer-funded benefits, healthcare inflation, and growing HSA balances.

Altogether, WEX is a high-quality business with dominant market share in niche B2B verticals, pricing power, and structural growth tailwinds. It has historically grown revenue at 8-12% organically and EPS at 15-20% organically. As a payments company, WEX is capital-light and able to pass on inflation automatically.

Valuation

Despite the attractive nature of the underlying business and growth, WEX trades at just 12.5x 2024 earnings with an 8% FCF yield. This is cheap on an absolute basis and a -30% discount to its historical (2011-2021) valuation. WEX consistently traded at 18-20x P/E in the six years leading up to COVID, but its valuation has been depressed for the past two years:

WEX P/E Ratio

There are two drivers of this de-rating:

1. Competitive Concerns in Payments: The entire payments space de-rated in late 2021 due to concerns around new fintech entrants in the payments space. Large peers FI, FISV, GPN, and PYPL all have similar historical P/E ratio trajectories as WEX.
2. Electric Vehicles: The market is concerned that the unit economics in a world with Electric Vehicles are uncertain and inferior to those in a world with ICE vehicles. Given EV’s cost 30-40% less to charge than a traditional ICE vehicle, WEX will take a hit to its payment processing revenues if it does not re-price its contracts. 

These concerns are mis-placed. On competition – most of the fintech players that the market is worried about (ie Stripe, Adyen, Marqeta) do not actually compete with WEX at all. WEX operates in niche markets that are rounding errors to most fintech firms. WEX’s dominant market share has actually increased despite price increases in the last two years. WEX is simply too small and complicated for most payments analysts to care about, so it was thrown out with other payments companies when the entire space de-rated.

On Electric Vehicles, conversations with fleet managers indicate that the value WEX provides is augmented in a world with EV’s and it will be able to re-price its contracts to make up for any lost payment processing revenues. Managers report that the data and services they will need in an EV world are far more complex than ICE – they will need services such as electricity optimization, home charging, depot charging, and emissions/TCO comparisons with their ICE vehicles – all of which WEX can provide. Diligence also suggests that WEX should have pricing power. Customers report that WEX’s current average subscription price of $20/vehicle/year is far lower than the value it provides and far lower than other fleet telematics vendors, which can be north of $500/vehicle/year. When WEX’s pricing power was tested in the commodity crisis of 2016, it increased fixed fees per vehicle by 36% in response to a -38% decline in fuel prices from 2014 to 2016. Lastly, the transition to EV’s among commercial customers is happening at a far slower pace than consumer EV’s. Only 1k out of the 19 million vehicles in WEX customer fleets today are electric, so they have plenty of time to navigate this transition.

Catalyst

What could make WEX re-rate?

1. Re-Rating of Payments Space: The entire payments space has begun to re-rate over the past couple of months as investors realize that (a) they are durable business models that can sustainably grow and (b) many of the fintech entrants from the 2021 SPAC mania have not turned out to be financially viable. Many of WEX peers have gotten out of the payments penalty box this year – ie FIS trades at 14x vs 10x at trough, FI at 17x vs 14x and trough, and FLT at 16x vs 13x at trough. WEX has been left behind thus far and continues to trade near all-time lows despite excellent operating performance.
2. WEX Operating Performance: Thus far, WEX has proven naysayers wrong and consistently reported strong earnings in the face of supposed competitive pressures. Although it may take time, it should re-rate if it continues to execute on its plan to grow revenues around ~10% and earnings in the high-teens.
3. SOTP Opportunities: If all else fails, there is tremendous embedded value in WEX’s Benefits business that is currently under-appreciated by the market. Leading Benefits peer HQY trades at 16x EBITDA or 27x P/E, far north of WEX. WEX can drive a SOTP-driven re-rating through increased investor education on the business, a sale, or spin-off.