FleetCor（FLT US）| Fleet is Back on its Feet; Initiate at Buy

Following the doldrums of the pandemic during which FleetCor’s core businesses were hit especially hard, the company has delivered impressive organic growth over the past 8 quarters. Despite a muted FY23 outlook driven by rising interest rates and the coming disposition of the company’s Russian operations, we believe the stock’s outperformance YTD is well deserved given our fundamental outlook on the company where we see upside to consensus EPS estimates once we exit the year. Further, we are fans of FLT’s efforts to simplify its operating model which we believe will help the company gain traction with generalist investors who may have once shied away from the stock given the large number of moving parts in the business. We believe FLT is well positioned to deliver consistent double-digit organic growth going forward driven by a continued recovery in the Fleet business, and sustained outperformance in FLT’s industry leading Corporate Payments and Lodging solutions. We are initiating coverage on FLT with a Buy rating and $310 target price.

In March, FLT announced that it had entered into a cooperation agreement with DE Shaw to undertake a strategic review of FLT’s portfolio. We expect this to result in the separation/sale of one or more of FLT’s business units. To this point, Bloomberg recently reported that FLT is exploring a sale of its prepaid card business which could be valued between $500m-$1bn. While our math suggests that this valuation would be slightly dilutive at the midpoint (accretive at the high end), we would welcome a sale given that the prepaid business faces secular headwinds and removing the asset, even at a slightly dilutive valuation, would simplify the story and expand FLT’s multiple, in our opinion. We also see the possibility that FLT elects to dispose additional ancillary businesses that may be less central to the strategic direction of the company. Finally, after re-segmenting its financial statements last qtr., we expect FLT will further refine its reporting structure and move to a 3- segment presentation (Vehicle & Mobility Payments, Corporate Payments, Lodging Solutions) within the next few quarters.

The core of FLT’s business is the company’s Fleet segment (~42% of revenue) that provides fueling and payment solutions for companies and government entities that operate vehicle fleets. While we expect growth in the Fleet segment to remain muted for the remainder of FY23 (FLT has guided to mid-single digit growth), we expect an acceleration in Fleet numbers in the coming years where we model organic revenue growth in the segment above consensus at ~6%/~8% Y/Y in FY24/ FY25. Further, we believe that FLT is the best positioned player in the broader fleet card industry to address the transition to EV/mixed use fleets following recent acquisitions (e.g., Plugsurfing) and success seen to date with EV unit economics in the UK, where FLT customers with mixed fleets are generating more revenue per card than ICE only fleets.

FLT’s Corporate Payments segment (~23% of revenue) provides customers with comprehensive B2B payment programs to ensure all their accounts payable are made safely and securely. B2B payments remains one of the hottest sub-sectors in fintech given expanding take rate opportunities and an untapped addressable market. Like companies such as BILL or AVDX, FLT has seen massive growth in this business coming out of the pandemic and processed ~$115bn in spending volumes in FY22 servicing middle market companies, primarily in the construction, transportation, and field services industries. Given FLT’s comprehensive solution and the significant white space ahead, we expect the Corporate Payments segment to grow ~19% Y/Y in FY23 with sustained growth in the high teens through the end of our forecast period.

Beyond questions on the complexity of the overall business and broader macro concerns impacting Fleet segment growth, 2 additional overhangs have weighed on FLT’s performance, in our view. The first of these related to a 2017 Federal Trade Commission (FTC) investigation into FLT’s marketing practices which has now been resolved. We believe FLT’s settlement with the FTC was reasonable and has been well received by the market as a key near-term overhang is removed. The second overhang relates to FLT’s planned disposition of its Russia business (~3%/ ~7% of FY22 revenue/net income). FLT recently disclosed that it had signed definitive documents to sell the Russia business to a local firm and is awaiting Russian government approval for the deal. FLT also noted that the estimated impact of the sale of the Russia business at the end of 2Q23 (i.e., no contribution in 2H23) would result in a -$55 to -$65m decrease in revenues and a decrease in EPS of -$0.30 to -$0.40. While losing a fast-growing asset with a healthy margin profile is not ideal, removing the uncertainty surrounding the asset sale would be another positive in the FLT story, in our view. Although FLT has pointed to the potential for a sale by the end of 2Q23, we would not be surprised by additional delays given the complexity of closing a deal under Russian regulations.

Our $310 target price is based on ~15x our CY24 P/E, a premium to legacy payment peers but a discount to the networks, which we believe is warranted given FLT’s topline growth trajectory and EPS growth potential over the mid-term. Risks include a slowdown in the demand environment for branded fuel cards or corporate payments services, further declines in fuel prices, increased FX headwinds, the disposition of the Russia business, and increasing competition.