November 13, 2012 - 11:44pm EST by
2012 2013
Price: 48.52 EPS $3.00 $3.60
Shares Out. (in M): 86 P/E 16.2x 13.5x
Market Cap (in $M): 4,182 P/FCF 15.5x 12.5x
Net Debt (in $M): 281 EBIT 0 0
TEV ($): 4,393 TEV/EBIT 0.0x 0.0x

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  • Payment services
  • Growth stock
  • Oligopoly
  • High Barriers to Entry, Moat
  • Recurring Revenues
  • Insider Ownership


SUMMARY: FLT is a payments oligopoly in a recurring fee-based business with extremely high barriers to entry. FLT is trading just over 10x 2014E cash EPS though it will grow earnings at a 20%+ CAGR for the foreseeable future. With a long runway of growth through existing customers, M&A and market penetration the street is underestimating FLT’s stated goal of 10% top-line and 20% bottom line growth. The company should do in excess of $4.30-4.60 in 2014 EPS compared to consensus estimates of low double-digit earnings growth to $3.52. At 16x, FLT should trade in excess of $70/share by the end of 2013.

Yes, it's a consolidator. No, I don't normally like to own many businesses where nearly 50% of total assets are goodwill & intangibles. But these guys are executing really well in a really good business with a really long runway. This is a multi-year 'open-ended' growth story with some pricing power where the street is not aggressive enough due to limited but improving disclosure around the drivers of the business. Happy to address industry structure in the Q&A but wanted to cover the high points concisely below.


0. What is the value proposition for a closed-loop credit card or fleet card?

A: Fleet operators save on fuel costs and can control/manage costs effectively. For example, a local landscaping company with 15 vehicles wants to ensure that employees are following set rules - for example, not using the company card to fill up their family's SUV, not driving 50 miles out of the usual service area, etc. The owner also understands that his employees can't float that kind of money; moreover, he doesn't want to waste resources doing T&E reports. In lieu of giving everybody an Amex and dealing with errors/abuse after the fact, the fleet card is an excellent solution that solves these problems in a cost effective manner.

Fuel merchants want to accept the card because they are given an advantage over the competing gas station across the street. The fuel card network draws traffic to their site and brings drivers into the c-store for other high margin purchases like food and cigarettes. For example, that landscaper may stop to fuel up the morning but also buy a few bags of ice, donuts and coffee for his crew and lunch for the afternoon. Customers on fuel cards spend more than the average customer who fills his gas tank. FLT’s installed base on average use just two different gas stations, so it really improves the value of the network for merchants who want that higher margin recurring business. It creates a very regular, Pavlovian response when a guy or gal needs to fill up the tank.


1. High barriers to entry in oligopoly give incumbents a long growth runway

  • Contacts suggest it would take around 10 years to build what FLT and WXS have built.
    • It takes years to sign up customers to build the right footprint of gas stations that customers want
    • Execution is not trivial. Technology and reporting requirements are a hurdle. You'd have to install hardware/software at every pump.
    • Scale is a barrier for large oil companies who are now outsourcing the management of their fuel cards
      • Visa and Mastercard tried to build fuel card networks a decade ago and both failed. They ultimately partnered with incumbents or backed away entirely.
      • These products are mission critical (can't get stranded on side of road with no gas) but are a low single digit portion of overall fleet costs, leaving room for pricing power

2. Growth opportunities in high quality, recurring fee business

  • The fuel card business creates a stream of recurring, fee-based revenue every time a driver needs to gas up the tank
  • SME fleets where FLT focuses are 28% penetrated in the US and much less in Europe and ROW. FLT is the #2 player in the US but is #1 within SME fleets as well as in UK, Brazil and Russia
  • Given its leading market share, FLT is a winner when it comes to oil majors outsourcing managementof fuel cards in Europe, a trend that is picking up steam with FLT’s win of the Shell contract. In the US, FLT already has Chevron, BP, Citgo and Arco. Oil majors are outsourcing more here because the fleet operators have the networks and scale to make cards more appealing to customers (example: Shell will have a universal card in Europe that means its fleet card customers can stop at more than JUST Shell gas stations, but will have an incentive to buy Shell gas through lower fees…if Shell offered this card on its own, they don’t have the full network to pull it off).
    • In Europe, over 80% of oil majors programs are still in-house vs just 20% in the US. Shell was the first major to really make this move in Europe and chose FLT

3. Proven value creation through M&A outside the US where FLT is the clear leader

  • Large opportunity to acquire smaller fuel card networks and grow them rapidly by increasing penetration and raising prices, upselling ancillary services.
  • FLT Brazil: the market leader in fuel cards. Payment services are accepted by two leading major oil retailers, Petrobras and Ipiranga. Together, they represent over 60% of all retail fuel purchases in Brazil. Competition/substitutes are paper vouchers and cash, so share gain opportunity is large.
  • FLT Russia: 30% of all commercial fuel purchased in Russia runs through FLT technology. About 80% market share within fuel cards.
  • Allstar in UK, deals in Mexico and other markets have proven to be situations where FLT can leverage the existing operations across its network and ramp margins via cross-selling new products/services to the current customer base.
  • FLT’s presence in global markets – while customers in Brazil don’t buy fuel in Europe and vice versa, having a presence in all these markets may allow for scale with the oil majors. WXS and other peers supposedly struggling to build a large presence in Europe where FLT is padding a lead through M&A + organic growth
  • Similar to acquisitive value creators like TDG, these businesses are always a bet on the come for the next deal. It is difficult to put it into numbers ex ante but there's a high probability of future M&A not in current numbers.

4. CEO owns a lot of stock and has a deep bench of talent.

  • CEO Ron Clarke owns > $125m of stock + options, the vast majority of that being directly owned shares. Clarke overhauled the nearly-bankrupt business when brought in with Summit.
  • He has been with FLT since 2001 and led the company to a nearly 30% revenue CAGR and > 40% earnings CAGR, rates that are superior to over-the-road national peers like WXS or Ceridian's Comdata
  • Company has successfully completed > 40 acquisitions since 2000, showing an ability to drive pricing and results at acquired fuel card networks. As recent deals roll into the would-be comp base, we'll see the street assumptions are far too low for organic growth in 2014
5.    Risks
  • There will be a hiccup at some point, initially nobody will know why, and it will scare investors. Given the many moving parts to the business and its limited time as a public company (4Q10 IPO), FLT generally discloses transactions and revenue/transaction. Not a whole lot of detail. They are improving here, figuring out what to give the street to decipher organic growth and understand the business better without pulling back the curtain so far that competitors and customers understand the inherent pricing power and strategy. All that said, when they do have a hiccup will we know why? It could be wholesale spreads, retail fuel prices, a slowdown in miles driven, a slowdown in the bundle or spend/customer, integration issues with a deal, etc. I maintain management has been very good here and executed very well, but the opportunity exists in part because the street is cautious with the limited metrics they have. That works the other way should there be an off quarter.
  • Fuel prices will be volatile. 2Q12 went a long way towards dispelling the notion that fuel price volatility is necessarily a good/bad thing for FLT. Over time the spread between retail and wholesale (~25% of the business) smooths out, but investors concerned that volatility would be negative saw in Q2 and Q3 that wasn't the case. Doesn't mean it is not a risk. Sustainably low fuel prices would be a headwind.
  • I am eager for a secondary from Summit, Chestnut and Bain which collectively own more than a third of the company. It may be a near-term overhang but hasn't stopped FLT from working as an investment in 2012.
  • Have to get comfortable that even through the financial crisis, mgmt has properly managed risk around extending 14-day credit to its customers



I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.


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