Wright Express Fuel Cards Help Truckers Fill Tanks

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Nobody likes the middleman. Unless, that is, he can save you tons of paperwork.

That's the appeal ofWright Express ( WXS ), a South Portland, Maine-based payments processor that offers credit card solutions, where cash, checks and long paper trails once ruled.

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.

Australian Acquisition

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 ( XOM ) andBP ( BP ), said Greiner. But there are only so many large fleet prospects.

"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 said.

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 solutions."

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 ( PCLN ) andExpedia ( EXPE ) have been a top performer in the "other payment solutions" portfolio.

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 Greiner.

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.



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: BP , EXPE , PCLN , WXS , XOM

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