FleetCor Roadmap Looks Far To Fuel Growth In Trucking

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From the United Kingdom to Russia and down to Mexico and Brazil, Norcross, Ga.-basedFleetCor Technologies ( FLT ) is on the move.

One of the top fuel-card companies in the U.S. for commercial vehicle fleets, it's been buying up local fuel-card networks outside the country to fuel its own growth.

Buyout targets tend to have "less sophisticated, underinvested and underutilized" networks, said Wayne Johnson, an analyst with Raymond James.

Most of the company's revenue comes from its payment network and card processing services for commercial and government fleets, tied to drivers' fuel purchases. Vehicles it serves tend to travel "short hauls" within 100 miles of loading spots, Johnson says.

FleetCor charges a monthly fee to fleets using the fuel cards and a usage fee to gas stations that accept the cards. FleetCor's electronic network connects the two sides.

After an acquisition, FleetCor turns up the throttle by transferring the new accounts to its platform "and in doing so it can introduce new services and sometimes raise pricing," Johnson says.

Strategic Acquirer

Six to 12 months down the road, the acquisitions typically drive per-share earnings higher than analysts' expectations, he says.

Case in point: FleetCor's third-quarter results, released Oct. 30 after the market close. Earnings jumped 30% from a year earlier to $1.08, 10 cents above Wall Street's consensus. Even excluding a tax benefit of 5 cents, it still beat views by 7 cents.

Revenue grew 20% to $225.2 million, also above views.

"It was an exceptional quarter," said Evercore Partners analyst David Togut. Investors must have thought so. Shares jumped nearly 8% the next day to a new high.

It didn't hurt that the company announced it made two new acquisitions in October, expanding products and services. Togut says the buys will "set the stage for strong earnings growth in 2014."

At the same time, management raised guidance for 2013 to $4.02 per share at the midpoint. The team started the year forecasting $3.65 at the midpoint and kept raising guidance.

One of the new buys, Atlanta-based NexTraq, provides fleet operators with real-time telematics vehicle tracking and fuel monitoring services. The other, Epyx in the U.K., uses an Internet-based system to link leasing and commercial fleet clients to 9,000 service garages there, earning a fee each time the system is used to support a service transaction.

"We've been looking for ideas to extend beyond fleet fueling into fleet maintenance," FleetCor CEO Ronald Clarke said in the earnings conference call.

FleetCor also said it closed on one of two Brazilian acquisition deals previously announced, that of DB Trans, a payment company for truckers. The other, for card and voucher firm VB Servicos, closed in August.

Togut figures the latest Brazilian acquisitions will add 20 cents to FleetCor's earnings in 2014.

"FleetCor will almost certainly be the fastest earnings grower in my payments' coverage over the next few years," Togut said. He covers 24 payments stocks, includingVisa ( V ),MasterCard ( MA ),Vantiv ( VNTV ) and FleetCor's closest rival, Maine-basedWEX ( WEX ), formerly called Wright Express.

WEX, which offers fleet and corporate payment products, also beat earnings and revenue views in the third quarter.

"WEX is more of a U.S. company," Togut said, though he added that it's been stepping up international expansion.

FleetCor has acquired nearly 60 companies since 2002. Third-quarter results got a lift from several of them, including deals made earlier this year in Australia, New Zealand and Brazil.

In addition, it saw continued growth from a North American workforce lodging firm acquired in 2009, Corporate Lodging Consultants. CLC gives truck drivers discounted room rates.

International revenue jumped nearly 30% from last year, "led by our U.K. business," Clarke said, for a total of $109.9 million. Revenue in North America grew 13.6% to $115.3 million.

Driving Growth Abroad

International is close to accounting for 50% of the firm's revenue, up from about 30% a few years ago.

Most of the company's acquisitions in recent years have occurred overseas. One of the largest was the $312 million purchase in late 2011 of AllStar Business Solutions, the U.K.'s leading fuel-card provider.

Earlier that year a Mexico City-based prepaid fuel and food voucher business marked the company's entry into Latin America.

Hopping aboard FleetCor's bandwagon in 2012 were a Russian fuel-card company and a fuel payment processor in Brazil. The latter targets trucks, ships, mining equipment and railroads; and links fleet operators, banks and oil companies.

"It's a fixed-cost business so the company with the greatest amount of volume wins," Johnson said. "FleetCor gets high margins and earnings acceleration from the layering on of new acquisitions on its existing infrastructure."

In addition to its core business, FleetCor has forged several outsourcing deals with oil companies such asChevron (CVX),BP (BP) and Arco for managing their corporate cards in the U.S.

Similar deals with oil companies in Europe could provide new growth opportunities, analysts say. But that could take several years given Europe's complexities, wrote Morgan Stanley analysts in a recent research note.

One of the first major oil-company outsourcing deals in Europe was EuroShell's 2011 contract with FleetCor to process fuel-card transactions in 35 countries, Morgan Stanley noted. But platform conversions have been slow due to "extensive customization requirements."

About 70% of European fleet volume flows through cards issued by oil companies and the bulk of those are still managed in-house, Morgan Stanley said.

Meanwhile, FleetCor's growing presence in emerging markets is seen as a positive since card markets there are at earlier stages of development than in the U.S. and therefore will grow at a faster rate.

But FleetCor's business in the U.K. market is hardly a laggard. Togut notes that third-quarter revenue jumped 35% from a year ago.

In a new partnership with Visa Europe, FleetCor will roll out highly secure EMV cards in 2014 in the U.K., seen as a revenue driver that year.

Acquisition opportunities are still plentiful in the fragmented U.S. market. But FleetCor, says Johnson, "made the choice that international is where it gets more bang for the buck."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: FLT , MA , V , VNTV , WEX

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