FLEETCOR TECHNOLOGIES INC FLT
March 18, 2016 - 6:01pm EST by
stanley339
2016 2017
Price: 147.40 EPS 0 0
Shares Out. (in M): 95 P/E 0 0
Market Cap (in $M): 13,959 P/FCF 0 0
Net Debt (in $M): 2,327 EBIT 0 0
TEV ($): 16,286 TEV/EBIT 0 0

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  • Multi-bagger
  • Fee based business

Description


Thesis:
We think FLT could have ~45% upside by YE17 from current prices and might be trading at ~12.5x 2018
Adj EPS. The math to get there utilizes a target forward P/E of 18x and assumes a 2018 Adjusted Cash
EPS figure of $12 representing a ~mid 20s EPS CAGR from 15-18’. Given the business quality, history,
best in class management team, and long-runway for growth beyond 2018, we believe that FleetCor
could trade for at least 18x forward earnings by YE17. Over the last 3 years FLT’s median Street Estimate
forward P/E multiple has been closer to ~23x. Since the IPO in late 2011 it has been ~20.5x (Bloomberg
figures).
 
We believe that this business could be a compounding machine for many years just like it has been in
the past. The FLT product portfolio retains top positions in a number of large and attractive TAMs with
minimal competition, under penetration, and high value propositions to the customer. Management
has a strong track record of growing the business, which we discuss below, and continues to position the
company in attractive end markets with acquisitions made over the last few years. As a testament to
the quality of this platform and the leadership behind it from 2005A to 2015A FLT compounded
revenue at ~28% and Adjusted Net Income at ~33%. Since 2010, FLT has compounded revenue at ~31%
and Adjusted Net Income at ~34%, which includes recent macro headwinds discussed later. This growth
includes ~65 acquisitions over time, the largest completed in 2014, but historically growth was achieved
without significant leverage. Management used to note that approximately half of their historic growth
was organic and half was driven by acquisition.
 
 
Business Description:
In the company’s own words:
 
 
“So first, I am going to spend a few minutes telling you a little bit who we are, the industries that we're
in, the geographies that we actually do business in. First and foremost, we view ourselves as a workforce
payment product company. We primarily offer Fleet Cards, but we have a number of different products
around the world as well. About 70% or so of our revenue is derived from the management of our various
fuel card assets around the world and the other 30% is our workforce payment products.
 
So as an example, just to mention a few products, again fuel cards, hopefully most of you are familiar
with those. Again, we manage -- 70% of our revenue or so is derived from that. We also have -- in the
United States, we have hotel cards. We have telematics products in the United States. We have virtual
cards in the United States and we also manage a gift card business in the United States, so we are one of
the largest gift card provider as well.
 
And then, internationally, we have many different sorts of products as well that are unique to some of
the geographies that we're in. Again, we primarily manage fuel card assets around the world, but
internationally we also have maintenance products. We have telematics products. We have toll,
transportation, payroll, and we have food card products as well.
 
The beauty of these products is they all have relatively the same margin dynamics. We are a relatively
high margin type business. Our EBITDA margins run over 50% around the world. And obviously, we have
some products with EBITDA margins as high as 90%, and on the low end, we are probably in the 40%
range. And then, on the average, we're in the low 50%s.
 
 
Our value proposition to our customers is basically control and savings. Our products offer a way for our
customers to better manage their workforces and then ultimately save money, particularly as it relates
to fuel. Our target customers are effectively everybody. It is every commercial fleet and every
government business around the world. Again, we offer a product that helps them to manage their
workforce and become more efficient and ultimately save money on the products that they buy.
 
We are global in scope today. As you can see on here, it says we have -- we do business in 53 countries.
We have 29 offices around the world. About one-third of our revenue is derived from our businesses that
we own internationally versus the United States.
 
Although that sounds like a big number from a country perspective, we're in -- practically, the way I look
at it, we are in fewer countries than that. Really, we're in seven or eight countries in a meaningful way.
Again, the United States is our number one country. About 70% of our revenue is derived from our
management of our fuel -- of our businesses in the United States and about 30% internationally.
 
Our number one international market is the UK, followed by Brazil today. And then, we also have
businesses in places like Australia, New Zealand, Mexico. We are in the continent of Europe through our
relationship with Euro Shell. We're in the Czech Republic and we are in Russia.
 
Our objective ultimately is to be in the top 20 GDP markets around the world and ultimately build big
businesses in each of those geographies, or at least be in as many of those top GDP markets as makes
sense.” – Raymond James Conference March 7th 2016
 
 
Fleet Cards:
While ~30% of the revenue comes from workforce payment solutions, which includes a number of high
quality products with run-ways for growth, the remaining ~70% of revenue comes from Fleet Cards. We
like to think of the Fleet Card business as the Amex Card for fueling used by businesses to manage and
control fuel expenditures by their employees. It’s a high barrier to entry business with network effects
and customers value the controls and special reporting functions FleetCor enables via proprietary Level
III data received from the merchant / fuel company at the time of fueling. Customers use the service to:
 
1) Prevent fuel theft by the drivers / employees
2) Monitor spending levels with special reporting - fuel is one of the larger expenses for fleets
3) Receive discounts from merchants through FLT’s buying power
4) Working capital used for fuel purchases
 
 
Business Quality:
FLT generates what we consider to be a lot of free cash flow each year. The customers with whom we
have spoken view the products as a creating a high ROI due to the dynamics discussed above. We view
FLT as a business with pricing power, switching costs, limited competition, inferior substitutes, and high
customer satisfaction rates. The inherent pricing power is aided by the industry structure and network
effects; FLT controls a lot of fuel volume.
 

FLT is a recurring revenue fee based business with 90% of their revenue recurring every year before they
sell one new account. We believe it performed relatively well in the GFC and could be characterized as
predictable. This allows management to have fairly high visibility into operations and how it will grow
over time based on their investment initiatives each year and the efficiency of such spend. We believe
that the ROI on new customers is extremely high, although one has to trust management on such
estimates as actual figures are not provided. A JPM Morgan note from Feb 22, 2016 does provide some
details on this topic. Given the products in the portfolio and the lower penetration of these products
relative to the value proposition to the customer this view of the business makes sense to us. ~70% of
the revenue comes from program fees and other charges with ~15% of revenue directly related to
absolute fuel prices and the remainder is tied to fuel spreads, which fluctuate over short periods, but are
largely stable over time. The portion of the business tied to program fees and other has gone up over
time, which one could view as a testament to their pricing power and stickiness with customers. A
skeptic may view it in a different light (potential to increase churn in the long-run if fees become too
burdensome) but conversations with management, customers, and competitors creates comfort around
this issue. The products seem to create value for the customers and there are limited / inferior
alternative options.
 
 
Industry Structure:
In our opinion, the fuel card industry in the US has evolved/merged into a niche oligopoly between
FleetCor, Wright Express, and to a lesser extent Voyager. We believe FleetCor is by far the best operator
and the earnings history would support that view, but Wright Express follows a similar playbook and the
two compete rather rationally with one another both domestically and globally.The alternative to a fuel
card is essentially cash, or credit cards, but credit cards do not have the controls nor the detailed
reporting functions that a dedicated fuel card enables. Globally, while it’s hard to generalize given the
number of countries FLT competes in, the competitive environment is often favorable.
FLT looks to acquire into a leadership platform initially, or build such a position over time in each
geography. As a case study one could evaluate what they have achieved in the UK over the last decade,
or Brazil more recently, and of course what has been achieved in the US. The assets purchased often
have good standalone value, but also tie into the overall customer account base with opportunity for
cross-selling, or creating cost synergies over time. This could also be used for support for how they were
able to win the Shell Europe Oil Partnership contract, which is the biggest Oil Partner in the market and
is a testament to the FLT technology platform. It is unlikely this deal could have been secured if FLT had
not spent years on the ground in Europe building out their network and market knowledge before this
RFP came for bidding. Acquisitions that took place years prior had standalone purpose (high standalone
unlevered ROIC) and sometimes can help serve long-term purposes as well. Meaning, these assets often
fit into a long-term vision for how the company wants to position itself, rather than simply finding a
place to deploy capital. We think FLT is likely using the same playbook across multiple geographies and
that there is plenty of areas for them to deploy capital attractively going forward. FLT’s technology
network and existing scale often creates structural advantages in buying similar assets relative to other
buyers.
 
 
Macro:
Due to persistent macro headwinds over the last 1 -2 years, primarily lower fuel prices and foreign
currency, which have suppressed earnings growth, we believe investors have the opportunity to own
FLT at an attractive valuation. As the company disclosed in their Q415 earnings release macro
headwinds, impacted EPS in 2015 and further reduced 2016 guidance. Specifically, as it relates to 2016
FLT would have guided EPS to $7.20 vs. $6.30 actual in 2015, or ~14% y/y, but instead issued guidance of
only 3% EPS growth.
 
“For 2016, we again have a number of macro-economic headwinds impacting our business, primarily
foreign exchange rates and fuel prices,” said Eric Dey, chief financial officer FleetCor Technologies,
Inc. “In aggregate, we are estimating that the macro-economic environment creates an
approximate$100 million revenue headwind and an approximate $0.70 adjusted net income per diluted
share headwind versus 2015. Despite these headwinds, we like our fundamentals, and are guiding to
year-over-year organic revenue growth of approximately 10% at constant fuel prices, currency, and
market spreads. Our adjusted net income per share guidance at the midpoint of the range
of $6.50 would have been approximately $7.20 for 2016 at constant fuel price, currency, and markets
spread margins.” – Q415 Earnings Release
 
Backing out headwinds in the 2015A results, based on commentary from the Q4 earnings call, earnings
would have grown 43% y/y. 2015 Results did benefit from their acquisition of Comdata, a peer in the
US, which closed in late 2014.
 
“In terms of 2015, to say that it was a crazy macro environment would be an understatement. The fact
that we printed 22% profit growth for the full year, that is quite encouraging. If you were to look at full
year 2015 on a like-for-like basis, a constant basis, we would have reported $1.08 of incremental cash
EPS. Instead of our reported number of $6.30, you are looking at a number of $7.38, which would be a
43% profit growth over 2014.
 
Each of the key macro variables that affect us, fuel price, FX and interest rates are all in a worse place
than they were for the full year or the average for 2015. And if you aggregate these environmental
factors, we are estimating approximately $100 million revenue headwind in 2016, versus a constant
2015 and approximately a $0.70 cash EPS headwind in 2016 versus a constant 2015. So, again, a lot of
challenge setting up here.” - Q415 Earnings release
 
Management Team:
This strikes us as a team to continue betting on. Ronald Clarke, Chairman/CEO has built and led FleetCor
for more than a decade and is well compensated with good growth hurdles to keep outperforming.
There’s an HBS case study on the company, which includes commentary on Ron from the Private Equity
partners that would be worth a study beyond the financial track record.
 
Growth Algorithm:
FLT grows in three ways: they build, they buy, and they partner. We believe that each of these three
legs to the growth formula should have a long run-way. In their conference calls, FLT targets 10%
organic top-line growth and describes that translating into 14-15% organic EPS growth due to operating
leverage. The organic growth excludes potential wins from major oil partners and capital allocation,
which has historically been deployed into acquisitions at good unlevered ROICs. The company’s goal is
to grow EPS at 20% or higher when including acquisitions, or partnerships. In the company’s own
words:
 
Yes, I think Tien-tsin, we said the organic model is 10% and14%, or 10% and 15%, given the margins
that the business has gotten to now. To kind of fill the boat with the other five plus percent we either get
some kind of big partner deals, or we buy. We said before if we are generating, $600 million in free cash
flow, and again you buy that at 10 times trailing and you improve it like we do, that adds the
incremental earnings to basically get us above 20%.” - Q415 Earnings Call
 
 
Oil Partnerships:
We believe that one large growth engine for the business that has yet to materialize in a meaningful way
is the opportunity to take over the management of private label fuel card programs currently run by
large oil companies in Europe / ROW. Management has described the opportunity in Europe being ~1B
transactions in size and while the math isn’t fully set given the nascent nature of this market those
transactions could be worth $2-3 each in revenue to FLT, at company consolidated EBITDA margins.
Europe could play out like the US outsourcing opportunity has evolved. The US Oil Companies have
outsourced ~80% of their internal private label fuel cards to primarily Wright Express and FleetCor
whereas in Europe the market is just now beginning to be outsourced. It’s pretty much a duopoly in
terms of who can manage these programs for major oil companies given the size, complexity, and
importance of such programs to the Oil Companies. Importantly, FleetCor has won Shell Europe and
Wright Express has won the contract for Esso (Exxon) over the last few years and both portfolios have
partial full outsourcing now in some countries. Further wins have been slow to materialize. If FLT
executes with Shell and Wright Express with Esso confidence should build for more outsourcing.
Management characterizes this as a when not if situation as European Oil Companies often lose money
on their internal fuel card platforms (it’s not a core competency) and are using IT systems that are
severely outdated and in need of a refresh. Management noted in their recent conference calls that
they expect more Oil Partnerships to be awarded this year. But, they’ve been too bullish in the past on
this topic.
 
TAM Penetration:
In the core fuel card product there seems to be plenty of market left to win. US penetration of the SMEs
for fuel cards is ~20-25% according to management and they believe 40-45% is max. In larger fleets fuel
card penetration is 80% and in very large fleets 90% +. Europe is also underpenetrated. In Europe, 30-
40% of the commercial fuel transactions are on oil company cards. We believe that FLT is well
positioned here. Some of FLT’s other products have much lower penetration. Emerging markets, such
as Brazil, also have low fuel card penetration in the key segments.
 
2018 Earnings / Valuation:
Management has guided to ~$6.50 of Adj EPS 2016A at the mid-point and also commented recently that
this translates into ~600m of FCF. The company ended 2015A with 2.45x Net Debt/EBITDA and says
they could run at 3 turns comfortably over time. If we grow the $6.50 at 14% on the bottom line
organically from now to 2018 this would result in ~$8.50 in 2018E Adj EPS. If we grow the 600m in
2016E FCF at 14% as well this would result in ~2B in FCF generation from 16-18’ to be used for
acquisitions. If management is able to deploy ~$3B into M&A over this time frame at a 10% unlevered
ROIC and borrows debt needed to fund this activity that could add an incremental $2.75 of EPS in 2018E.
On top of this, fuel / oil prices may go up between now and 2018 resulting in an EPS lift, but even if they
don’t management would likely take small re-pricing initiatives over time to drive an additional 25 cents
of EPS lift between now and 2018. Assuming a small/modest win on the European Oil Partnership side
of the business (or doing more for Shell Europe) could lead to another 50 cents of EPS accretion by 2018.
$8.50 + $2.75 + $0.25 + $0.50 = $12 in potential Adj EPS for 2018. An 18x multiple on this EPS would
yield a target price of ~$215 per share.
 
It’s worth noting that FLT just announced a ~$1.05B acquisition of STP in Brazil this week that is
expected to close in Q316. This looks like a high quality growth asset the EZ-Pass of Brazil based on
management’s presentation. If this acquisition does close, it would help narrow the gap of additional
acquisitions that need to be made to arrive at the above figures.
 
Conclusion:
We believe FleetCor (FLT) is a long because it is a high quality payments and workforce solutions
business led by a best in class management team with an admirable track record of superior valuation
creation and execution. It seems likely that FLT has a long run-way to continue growing through a
combination of organic and inorganic activity in an underpenetrated market. As a result, it’s not hard to
envision the company generating much more free cash flow in 5-10 years given the market opportunity
and favorable industry structure.
 
Risks:
Macro headwinds could intensify (fuel, currency, or global GDP). Growth could disappoint. Business
development such as M&A or Oil Partners may not materialize. Low disclosure around growth drivers
could create investor confusion if the model stopped performing.
 
 
Disclosure:
We and our affiliates are long FleetCor (FLT) and may buy additional shares or sell some or all of our
securities, at any time. We have no obligation to inform anybody of any changes in our views of FLT. This
is not a recommendation to buy or sell securities. Our research should not be taken for certainty. Please
conduct your own research and reach your own conclusion.
 
 
 
 

 

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

Catalyst

Earnings

M&A

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    Description


    Thesis:
    We think FLT could have ~45% upside by YE17 from current prices and might be trading at ~12.5x 2018
    Adj EPS. The math to get there utilizes a target forward P/E of 18x and assumes a 2018 Adjusted Cash
    EPS figure of $12 representing a ~mid 20s EPS CAGR from 15-18’. Given the business quality, history,
    best in class management team, and long-runway for growth beyond 2018, we believe that FleetCor
    could trade for at least 18x forward earnings by YE17. Over the last 3 years FLT’s median Street Estimate
    forward P/E multiple has been closer to ~23x. Since the IPO in late 2011 it has been ~20.5x (Bloomberg
    figures).
     
    We believe that this business could be a compounding machine for many years just like it has been in
    the past. The FLT product portfolio retains top positions in a number of large and attractive TAMs with
    minimal competition, under penetration, and high value propositions to the customer. Management
    has a strong track record of growing the business, which we discuss below, and continues to position the
    company in attractive end markets with acquisitions made over the last few years. As a testament to
    the quality of this platform and the leadership behind it from 2005A to 2015A FLT compounded
    revenue at ~28% and Adjusted Net Income at ~33%. Since 2010, FLT has compounded revenue at ~31%
    and Adjusted Net Income at ~34%, which includes recent macro headwinds discussed later. This growth
    includes ~65 acquisitions over time, the largest completed in 2014, but historically growth was achieved
    without significant leverage. Management used to note that approximately half of their historic growth
    was organic and half was driven by acquisition.
     
     
    Business Description:
    In the company’s own words:
     
     
    “So first, I am going to spend a few minutes telling you a little bit who we are, the industries that we're
    in, the geographies that we actually do business in. First and foremost, we view ourselves as a workforce
    payment product company. We primarily offer Fleet Cards, but we have a number of different products
    around the world as well. About 70% or so of our revenue is derived from the management of our various
    fuel card assets around the world and the other 30% is our workforce payment products.
     
    So as an example, just to mention a few products, again fuel cards, hopefully most of you are familiar
    with those. Again, we manage -- 70% of our revenue or so is derived from that. We also have -- in the
    United States, we have hotel cards. We have telematics products in the United States. We have virtual
    cards in the United States and we also manage a gift card business in the United States, so we are one of
    the largest gift card provider as well.
     
    And then, internationally, we have many different sorts of products as well that are unique to some of
    the geographies that we're in. Again, we primarily manage fuel card assets around the world, but
    internationally we also have maintenance products. We have telematics products. We have toll,
    transportation, payroll, and we have food card products as well.
     
    The beauty of these products is they all have relatively the same margin dynamics. We are a relatively
    high margin type business. Our EBITDA margins run over 50% around the world. And obviously, we have
    some products with EBITDA margins as high as 90%, and on the low end, we are probably in the 40%
    range. And then, on the average, we're in the low 50%s.
     
     
    Our value proposition to our customers is basically control and savings. Our products offer a way for our
    customers to better manage their workforces and then ultimately save money, particularly as it relates
    to fuel. Our target customers are effectively everybody. It is every commercial fleet and every
    government business around the world. Again, we offer a product that helps them to manage their
    workforce and become more efficient and ultimately save money on the products that they buy.
     
    We are global in scope today. As you can see on here, it says we have -- we do business in 53 countries.
    We have 29 offices around the world. About one-third of our revenue is derived from our businesses that
    we own internationally versus the United States.
     
    Although that sounds like a big number from a country perspective, we're in -- practically, the way I look
    at it, we are in fewer countries than that. Really, we're in seven or eight countries in a meaningful way.
    Again, the United States is our number one country. About 70% of our revenue is derived from our
    management of our fuel -- of our businesses in the United States and about 30% internationally.
     
    Our number one international market is the UK, followed by Brazil today. And then, we also have
    businesses in places like Australia, New Zealand, Mexico. We are in the continent of Europe through our
    relationship with Euro Shell. We're in the Czech Republic and we are in Russia.
     
    Our objective ultimately is to be in the top 20 GDP markets around the world and ultimately build big
    businesses in each of those geographies, or at least be in as many of those top GDP markets as makes
    sense.” – Raymond James Conference March 7th 2016
     
     
    Fleet Cards:
    While ~30% of the revenue comes from workforce payment solutions, which includes a number of high
    quality products with run-ways for growth, the remaining ~70% of revenue comes from Fleet Cards. We
    like to think of the Fleet Card business as the Amex Card for fueling used by businesses to manage and
    control fuel expenditures by their employees. It’s a high barrier to entry business with network effects
    and customers value the controls and special reporting functions FleetCor enables via proprietary Level
    III data received from the merchant / fuel company at the time of fueling. Customers use the service to:
     
    1) Prevent fuel theft by the drivers / employees
    2) Monitor spending levels with special reporting - fuel is one of the larger expenses for fleets
    3) Receive discounts from merchants through FLT’s buying power
    4) Working capital used for fuel purchases
     
     
    Business Quality:
    FLT generates what we consider to be a lot of free cash flow each year. The customers with whom we
    have spoken view the products as a creating a high ROI due to the dynamics discussed above. We view
    FLT as a business with pricing power, switching costs, limited competition, inferior substitutes, and high
    customer satisfaction rates. The inherent pricing power is aided by the industry structure and network
    effects; FLT controls a lot of fuel volume.
     

    FLT is a recurring revenue fee based business with 90% of their revenue recurring every year before they
    sell one new account. We believe it performed relatively well in the GFC and could be characterized as
    predictable. This allows management to have fairly high visibility into operations and how it will grow
    over time based on their investment initiatives each year and the efficiency of such spend. We believe
    that the ROI on new customers is extremely high, although one has to trust management on such
    estimates as actual figures are not provided. A JPM Morgan note from Feb 22, 2016 does provide some
    details on this topic. Given the products in the portfolio and the lower penetration of these products
    relative to the value proposition to the customer this view of the business makes sense to us. ~70% of
    the revenue comes from program fees and other charges with ~15% of revenue directly related to
    absolute fuel prices and the remainder is tied to fuel spreads, which fluctuate over short periods, but are
    largely stable over time. The portion of the business tied to program fees and other has gone up over
    time, which one could view as a testament to their pricing power and stickiness with customers. A
    skeptic may view it in a different light (potential to increase churn in the long-run if fees become too
    burdensome) but conversations with management, customers, and competitors creates comfort around
    this issue. The products seem to create value for the customers and there are limited / inferior
    alternative options.
     
     
    Industry Structure:
    In our opinion, the fuel card industry in the US has evolved/merged into a niche oligopoly between
    FleetCor, Wright Express, and to a lesser extent Voyager. We believe FleetCor is by far the best operator
    and the earnings history would support that view, but Wright Express follows a similar playbook and the
    two compete rather rationally with one another both domestically and globally.The alternative to a fuel
    card is essentially cash, or credit cards, but credit cards do not have the controls nor the detailed
    reporting functions that a dedicated fuel card enables. Globally, while it’s hard to generalize given the
    number of countries FLT competes in, the competitive environment is often favorable.
    FLT looks to acquire into a leadership platform initially, or build such a position over time in each
    geography. As a case study one could evaluate what they have achieved in the UK over the last decade,
    or Brazil more recently, and of course what has been achieved in the US. The assets purchased often
    have good standalone value, but also tie into the overall customer account base with opportunity for
    cross-selling, or creating cost synergies over time. This could also be used for support for how they were
    able to win the Shell Europe Oil Partnership contract, which is the biggest Oil Partner in the market and
    is a testament to the FLT technology platform. It is unlikely this deal could have been secured if FLT had
    not spent years on the ground in Europe building out their network and market knowledge before this
    RFP came for bidding. Acquisitions that took place years prior had standalone purpose (high standalone
    unlevered ROIC) and sometimes can help serve long-term purposes as well. Meaning, these assets often
    fit into a long-term vision for how the company wants to position itself, rather than simply finding a
    place to deploy capital. We think FLT is likely using the same playbook across multiple geographies and
    that there is plenty of areas for them to deploy capital attractively going forward. FLT’s technology
    network and existing scale often creates structural advantages in buying similar assets relative to other
    buyers.
     
     
    Macro:
    Due to persistent macro headwinds over the last 1 -2 years, primarily lower fuel prices and foreign
    currency, which have suppressed earnings growth, we believe investors have the opportunity to own
    FLT at an attractive valuation. As the company disclosed in their Q415 earnings release macro
    headwinds, impacted EPS in 2015 and further reduced 2016 guidance. Specifically, as it relates to 2016
    FLT would have guided EPS to $7.20 vs. $6.30 actual in 2015, or ~14% y/y, but instead issued guidance of
    only 3% EPS growth.
     
    “For 2016, we again have a number of macro-economic headwinds impacting our business, primarily
    foreign exchange rates and fuel prices,” said Eric Dey, chief financial officer FleetCor Technologies,
    Inc. “In aggregate, we are estimating that the macro-economic environment creates an
    approximate$100 million revenue headwind and an approximate $0.70 adjusted net income per diluted
    share headwind versus 2015. Despite these headwinds, we like our fundamentals, and are guiding to
    year-over-year organic revenue growth of approximately 10% at constant fuel prices, currency, and
    market spreads. Our adjusted net income per share guidance at the midpoint of the range
    of $6.50 would have been approximately $7.20 for 2016 at constant fuel price, currency, and markets
    spread margins.” – Q415 Earnings Release
     
    Backing out headwinds in the 2015A results, based on commentary from the Q4 earnings call, earnings
    would have grown 43% y/y. 2015 Results did benefit from their acquisition of Comdata, a peer in the
    US, which closed in late 2014.
     
    “In terms of 2015, to say that it was a crazy macro environment would be an understatement. The fact
    that we printed 22% profit growth for the full year, that is quite encouraging. If you were to look at full
    year 2015 on a like-for-like basis, a constant basis, we would have reported $1.08 of incremental cash
    EPS. Instead of our reported number of $6.30, you are looking at a number of $7.38, which would be a
    43% profit growth over 2014.
     
    Each of the key macro variables that affect us, fuel price, FX and interest rates are all in a worse place
    than they were for the full year or the average for 2015. And if you aggregate these environmental
    factors, we are estimating approximately $100 million revenue headwind in 2016, versus a constant
    2015 and approximately a $0.70 cash EPS headwind in 2016 versus a constant 2015. So, again, a lot of
    challenge setting up here.” - Q415 Earnings release
     
    Management Team:
    This strikes us as a team to continue betting on. Ronald Clarke, Chairman/CEO has built and led FleetCor
    for more than a decade and is well compensated with good growth hurdles to keep outperforming.
    There’s an HBS case study on the company, which includes commentary on Ron from the Private Equity
    partners that would be worth a study beyond the financial track record.
     
    Growth Algorithm:
    FLT grows in three ways: they build, they buy, and they partner. We believe that each of these three
    legs to the growth formula should have a long run-way. In their conference calls, FLT targets 10%
    organic top-line growth and describes that translating into 14-15% organic EPS growth due to operating
    leverage. The organic growth excludes potential wins from major oil partners and capital allocation,
    which has historically been deployed into acquisitions at good unlevered ROICs. The company’s goal is
    to grow EPS at 20% or higher when including acquisitions, or partnerships. In the company’s own
    words:
     
    Yes, I think Tien-tsin, we said the organic model is 10% and14%, or 10% and 15%, given the margins
    that the business has gotten to now. To kind of fill the boat with the other five plus percent we either get
    some kind of big partner deals, or we buy. We said before if we are generating, $600 million in free cash
    flow, and again you buy that at 10 times trailing and you improve it like we do, that adds the
    incremental earnings to basically get us above 20%.” - Q415 Earnings Call
     
     
    Oil Partnerships:
    We believe that one large growth engine for the business that has yet to materialize in a meaningful way
    is the opportunity to take over the management of private label fuel card programs currently run by
    large oil companies in Europe / ROW. Management has described the opportunity in Europe being ~1B
    transactions in size and while the math isn’t fully set given the nascent nature of this market those
    transactions could be worth $2-3 each in revenue to FLT, at company consolidated EBITDA margins.
    Europe could play out like the US outsourcing opportunity has evolved. The US Oil Companies have
    outsourced ~80% of their internal private label fuel cards to primarily Wright Express and FleetCor
    whereas in Europe the market is just now beginning to be outsourced. It’s pretty much a duopoly in
    terms of who can manage these programs for major oil companies given the size, complexity, and
    importance of such programs to the Oil Companies. Importantly, FleetCor has won Shell Europe and
    Wright Express has won the contract for Esso (Exxon) over the last few years and both portfolios have
    partial full outsourcing now in some countries. Further wins have been slow to materialize. If FLT
    executes with Shell and Wright Express with Esso confidence should build for more outsourcing.
    Management characterizes this as a when not if situation as European Oil Companies often lose money
    on their internal fuel card platforms (it’s not a core competency) and are using IT systems that are
    severely outdated and in need of a refresh. Management noted in their recent conference calls that
    they expect more Oil Partnerships to be awarded this year. But, they’ve been too bullish in the past on
    this topic.
     
    TAM Penetration:
    In the core fuel card product there seems to be plenty of market left to win. US penetration of the SMEs
    for fuel cards is ~20-25% according to management and they believe 40-45% is max. In larger fleets fuel
    card penetration is 80% and in very large fleets 90% +. Europe is also underpenetrated. In Europe, 30-
    40% of the commercial fuel transactions are on oil company cards. We believe that FLT is well
    positioned here. Some of FLT’s other products have much lower penetration. Emerging markets, such
    as Brazil, also have low fuel card penetration in the key segments.
     
    2018 Earnings / Valuation:
    Management has guided to ~$6.50 of Adj EPS 2016A at the mid-point and also commented recently that
    this translates into ~600m of FCF. The company ended 2015A with 2.45x Net Debt/EBITDA and says
    they could run at 3 turns comfortably over time. If we grow the $6.50 at 14% on the bottom line
    organically from now to 2018 this would result in ~$8.50 in 2018E Adj EPS. If we grow the 600m in
    2016E FCF at 14% as well this would result in ~2B in FCF generation from 16-18’ to be used for
    acquisitions. If management is able to deploy ~$3B into M&A over this time frame at a 10% unlevered
    ROIC and borrows debt needed to fund this activity that could add an incremental $2.75 of EPS in 2018E.
    On top of this, fuel / oil prices may go up between now and 2018 resulting in an EPS lift, but even if they
    don’t management would likely take small re-pricing initiatives over time to drive an additional 25 cents
    of EPS lift between now and 2018. Assuming a small/modest win on the European Oil Partnership side
    of the business (or doing more for Shell Europe) could lead to another 50 cents of EPS accretion by 2018.
    $8.50 + $2.75 + $0.25 + $0.50 = $12 in potential Adj EPS for 2018. An 18x multiple on this EPS would
    yield a target price of ~$215 per share.
     
    It’s worth noting that FLT just announced a ~$1.05B acquisition of STP in Brazil this week that is
    expected to close in Q316. This looks like a high quality growth asset the EZ-Pass of Brazil based on
    management’s presentation. If this acquisition does close, it would help narrow the gap of additional
    acquisitions that need to be made to arrive at the above figures.
     
    Conclusion:
    We believe FleetCor (FLT) is a long because it is a high quality payments and workforce solutions
    business led by a best in class management team with an admirable track record of superior valuation
    creation and execution. It seems likely that FLT has a long run-way to continue growing through a
    combination of organic and inorganic activity in an underpenetrated market. As a result, it’s not hard to
    envision the company generating much more free cash flow in 5-10 years given the market opportunity
    and favorable industry structure.
     
    Risks:
    Macro headwinds could intensify (fuel, currency, or global GDP). Growth could disappoint. Business
    development such as M&A or Oil Partners may not materialize. Low disclosure around growth drivers
    could create investor confusion if the model stopped performing.
     
     
    Disclosure:
    We and our affiliates are long FleetCor (FLT) and may buy additional shares or sell some or all of our
    securities, at any time. We have no obligation to inform anybody of any changes in our views of FLT. This
    is not a recommendation to buy or sell securities. Our research should not be taken for certainty. Please
    conduct your own research and reach your own conclusion.
     
     
     
     

     

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

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