Fleetcor Technologies: Rating Upgrade As Valuation Is Cheap (NYSE:FLT)

Overview

My recommendation for FLEETCOR Technologies (NYSE:FLT) is a buy rating, as I believe the market is overly punishing FLT for the 4Q23 miss vs. consensus, and at the current valuation, the upside is attractive. Moreover, the FLT growth outlook is much clearer today as management has ended its strategic review, which removes the uncertainty that the market has had over the past quarters. Note that I previously rated a hold rating for FLT as I was worried that any further decline in fuel prices would negatively impact FLT performance (both revenue and earnings). Furthermore, based on my previous model, there was no upside to the stock.

Recent results & updates

FLT reported 4Q23 revenue of $937 million, coming in below consensus expectation for 7% growth (FLT saw 6.1% growth). That said, cost was well managed in 4Q23, where total expenses fell 0.2% to $513 million, leading to EBITDA growing at a higher pace than revenue. GAAP EBITDA grew ~11% to $508 million (albeit still below consensus estimates). Adj EPS grew at a similar pace of ~11% to $4.44, which was modestly below consensus expectations. The market clearly perceived this as a weak performance, as the share price fell by more than 10% after the earnings. However, I believe the market is too shortsighted and see this as an attractive buying opportunity.

To start off, I believe the sharp fall in share price is primarily due to FLT missing consensus expectations for the second consecutive quarter. Let me remind readers that FLT has never missed consensus EPS expectations for the past 10 years (except in 3Q/4Q23). As such, this 4Q23 likely anchored the thought into consensus that management guidance is no longer as credible as it was. However, to be fair, I believe the 4Q23 miss does not indicate any structural impairment to the FLT growth outlook. There are a couple of factors that led to this miss. Firstly, gift card shipments were pushed out into 1Q24, which is simply a timing issue. Secondly, FLT did not experience the same weather-related benefit that helped 4Q22 airline and insurance vertical performance (there were no major weather events in 4Q). It is entirely up to God on how the weather is going to be, so I would think that over a longer period, FLT should see a balanced mix of both good and bad weather. The third factor that appears to be a major concern at the headline level is that corporate payments organic growth decelerated by 500bps to 15% y/y organic growth as partner channel (which is about 5% of the segment revenue) saw a steep decline of 31% (a big stepdown from the 15% decline in 3Q23), which translates to around 100 to 200bps of the 500bps deceleration. The way I see this situation is that FLT is still growing organically in the mid-teens range, which I think is commendable given the macro conditions. And if we were to exclude the partner channel growth, the segment actually grew by 20%. While this 20% is a 400bps deceleration vs. 3Q23 due to weaker direct payables, I would not jump ahead to conclude that growth is going to continue declining as cross-border remains strong, growing 21% accelerated by 200bps vs. 3Q23, and retention rate continues to trend well, improving to 92%. In addition, FY24 should be a stronger year as FY23 is an easy comp, and partner channel growth is unlikely to get worse from here as management is confident that partner channel growth will be flat in FY24 due to visibility from minimum volume thresholds in contracts.

These aside, I also expect execution to be more focused and flawless in FY24 given that resources that were previously allocated to the strategic review process have ended, FLT retains the Corporate Payments business, and the growth outlook of the business has become clear. While this is disappointing to some investors that are betting on the sale, I think management’s intention to transition the Fleet business into a broader Vehicle Payments business (i.e., targeting EVs and expanding to the consumer space, etc.) is an alright strategy, as I believe EV adoption has a secular tailwind driving the growth, and entering early gives FLT a first-mover advantage in building up its brand awareness. I believe the fact that FLT managed to sign Tesla in the UK is evidence of the company’s leadership position in the EV space. Also, I thought it was positive that management made it clear they were going to restart their M&A strategy, especially in the corporate payments segment. This should remove any uncertainties about how FLT is going to allocate the $1.4 billion of cash sitting on the balance sheet.

FLT has also rolled out a couple of interesting new products that I believe will drive up growth in FY24. Management expectation is for new products to accelerate revenue by 100 to 200 bps over time, with more contribution coming online in FY25 vs. FY24. The products are:

1. Corpay One, an all-in-one virtual card for fuel-based businesses
2. Comdata Connect Card, a business card with fuel discounts for small trucking companies
3. Corpay Complet, a spend management solution targeted at mid-market firms
4. CLC Choice, a workforce lodging solution for employers

Valuation and risk

According to my model, FLT is valued at $330, representing a 21% increase. This target price is based on my growth forecast of 9/10% over the next two years. The rationale for the modest dip in FY24 was to reflect management guidance (I still think management guidance is very credible), which I think is plausible given the miss in 4Q23 was not indicative of any growth impairments and that management has visibility into the partner channel performance, while the increase in FY25 is to reflect the higher contribution of new products. Similarly, I used management FY24 GAAP net income guidance for my FY24 assumption and expect margin to grow in FY25 as management continues to keep expenses in check. All in all, my growth outlook is positive (I am not assuming a full recovery in macroeconomic conditions, which could drive growth even higher), and I do not think FLT should be trading at way below its 10-year average forward PE multiple. At the current 14x, I think the market is overly punishing FLT for the 4Q23 miss. If we look at FLT pre-covid performance (FY18/FY19), the company grew its top line in the high-single-digit range and traded at ~19x. My current outlook for FLT is that it should grow at near 10% for the next 2 years and see net margins improving. As such, I believe FLT should trade at 19x (its average).

One risk here is that EV adoption might be a lot slower than expected. If true, FLT might be investing in an industry that is not experiencing high growth in the near term. Which also means growth could turn slower.

Summary

I recommend a buy rating to FLT. I believe the market has overly punished FLT share price and valuation after the 4Q23 miss that is not as bad as it seems. Importantly, the growth outlook has gained clarity with the conclusion of FLT’s strategic review, removing previous market uncertainties. The 4Q23 miss, primarily due to timing issues and weather-related factors, does not indicate a structural impairment in FLT’s growth trajectory. Corporate payments’ organic growth remains commendable in the mid-teens range, and FY24 is expected to be stronger with focused execution and new product launches. While disappointed investors expected a sale, FLT’s transition to a broader Vehicle Payments business aligns with the EV industry’s secular tailwind. The restart of M&A activities and innovative product offerings also contribute to a positive outlook.