Nobody likes the middleman. Unless, that is, he can save you
tons of paperwork.
That's the appeal ofWright Express (
), a South Portland, Maine-based payments processor that offers
credit card solutions, where cash, checks and long paper trails
For a cut of the action, Wright Express equips corporate and
government truck and auto fleets with special purpose credit
cards for fuel purchases and maintenance. When a driver fills up
at the pump, he uses plastic instead of cash. The fuel or service
provider collects the payment from Wright, less some processing
fees. Fuel card fees produced the bulk of Wright Express' total
$553 million in revenue last year. Wright later collects the full
bill from the fleet operator.
It's a process that has worked well as Wright has increased
its fleet partnerships and won the participation of fuel and
service providers. Last year, Wright Express' fuel cards were
used by 6.6 million commercial and government vehicles, the
company reports in SEC filings.
Wright Express fuel cards are accepted by more than 180,000
fuel and service providers in the U.S. Largely through its 2010
acquisition of RD Card Holdings Australia, Wright Express has
also established a presence Down Under. It claims 350,000 fuel
cards in circulation there, along with a network of 10,000 fuel
and maintenance sites that accept the cards.
Spending by existing fuel card customers was actually down
slightly in the first quarter. Still, Wright grew its fuel-card
business by adding new fleet customers, especially smaller
businesses and municipalities. "They've been successful with
local governments," said Sterne Agee analyst Greg Smith.
"It's a good, solid growth company. Not hypergrowth, but solid
growth," said William Blair analyst Robert Napoli. (William Blair
is a market maker in Wright Express stock and holds a large
investment position too.)
It is also a very profitable company. Pretax margins have been
in the 33% range. After-tax profit margins were 25% in the most
recent reporting period. "Twenty-five percent after-tax is very
attractive," noted Douglas Greiner, an analyst with Compass Point
Research and Trading.
Though Wright is an economically sensitive business, it has
fared well in recent years because it has been aligned with two
macro trends. Since Wright typically earns a percentage of fuel
purchases, it benefits from rising gasoline and diesel prices.
And since it functions as a short-term lender in advancing
payments to merchants, it benefits from low interest rates.
Wright operates a banking subsidiary that raises capital by
issuing certificates of deposit. With the Fed helping to push CD
rates down to nearly nothing, Wright has had an exceptionally
cheap cost of capital.
The fuel-card business is Wright's cash cow as it recently
siphoned off 1.64% of fuel bills in processing fees. But it is
not growing all that quickly.
With oil prices reversing, falling gasoline prices hurt as
they lower the fuel bills on which Wright takes its cut. Greiner
estimates that a 50-cent drop in gasoline prices would result in
a 10% hit to fuel-card revenues. But Wright does hedge against
fuel price changes and claims its hedges cover 80% of exposure to
fuel price volatility.
Wright Express faces some hurdles in growing its fuel-card
business. It has already signed up many of the most attractive
fleet customers. These include the likes ofExxonMobil (
) andBP (
), said Greiner. But there are only so many large fleet
"The large fleet market is very saturated," said Greiner.
He does see ongoing opportunity with smaller fleets consisting
of 15 or fewer vehicles. "The opportunity for growth is in the
small-fleet market. They need to be successful there," he
But Wright can also look to growth from what is now a lesser
part of the business: use of cards in online travel and health
care claims processing. These are lumped together in a category
that carries the clumsy catch-all title of "other payment
In the first quarter, that segment, much smaller than fuel
cards, grew by 44% to $31 million. That now represents 22% of
total revenue, CFO Steven Elder told analysts in reporting
first-quarter earnings. Corporate charge cards used to pay for
hotel reservations withPriceline (
) andExpedia (
) have been a top performer in the "other payment solutions"
Health Care Business
On June 20, Wright Express announced an agreement with
PaySpan, a major health care payment processor. Analysts like the
deal and its long-term potential.
"It could very well become a top 10 customer for them," said
Sterne Agee's Smith.
Though terms of the deal have not been detailed, analysts
outline the way they think it would work. Currently, payment
processors like PaySpan pay hospitals with checks from insurers.
Wright Express' single-use credit card payments would reduce
paperwork and make payments easier to track.
For each transaction, health care providers would pay Wright
an interchange fee, likely less than 1% of the transaction value,
said Greiner of Compass Point Research. The fee would be shared
with PaySpan, giving the Wright partner added incentive.
Greiner thinks PaySpan could eventually become one of Wright's
10 biggest accounts. And he sees potential for further forays
into health care claims payment and other vertical markets.
"Collectively, there's an opportunity in education, insurance and
health care for these kinds of single-use cards," said
Wright may not be a spectacular growth vehicle. But it does
have the ability to efficiently leverage its technology across
multiple vertical markets. So any incremental business should
serve to pad those plump margins.