Recommendation
I continue to rate FLEETCOR Technologies (NYSE:FLT) as a buy as the Fleet segment continues to show signs of improvement and attractive growth opportunities in its Brazil segments. I’d like to point out that the performance in 1Q23 was particularly impressive, with record bookings, retention, and credit trends. Altogether, they drove 12% organic revenue and 16% EBITDA growth. In addition to the company’s overall strong performance, management has been aggressively reorienting the company towards the right direction (tightening credit standards, roll out of EV solutions, integrating Global Reach). I also like the fact that management re-segmentized the business to better align activities with its name. Other is now Brazil, and Fuel is Fleet to reflect the addition of revenue from fleet services. This makes it easier for investors to understand and model the business, in my opinion. In terms of innovation and long-term growth prospect, I remain confident as well given the successful monetization of its live EV solutions. Despite the fact that FLT’s core businesses are vulnerable to macro pressure, I am confident that the company has the capacity to weather the storm and, if necessary, execute opportunistic M&A to emerge even stronger, especially since M&A is a strength of management.
Operating performance outlook
I expect the Fleet segment to start accelerating from 1Q23 onwards, despite the weak performance in 1Q23 which is below historical normalized rates of mid-single digits. The slow expansion in 1Q23 shouldn’t be interpreted as a sign of underlying problems; rather, it was the result of a year with a particularly difficult comparison vs last year. The fact that demand has remained relatively stable is a positive sign, according to management. With the quarter well underway, I anticipate accelerating performance as FLT continues to outpace the more challenging fuel comps from the previous year. My optimistic view of the future is backed up by other metrics as well. Customer retention is still above 90%, with the sequential drop being driven by FLT’s proactive credit tightening to remove non-creditworthy customers (improving the overall portfolio quality). However, I anticipate that FLT will encounter challenges due to the smaller fleets, which tend to have higher profit margins, redirecting their volume to larger contract carriers due to the availability of lower spot rates. Corporate Payments also continue to perform very strongly by growing 19% organically, led by full AP automation that was up 40% to 50%. I expect this trend to continue, which is in-line with management long-term growth target. Along with the company’s potential for organic growth, I am excited to see management pursue additional value-adding deals now that the Global Reach acquisition has been integrated into the company to a significant degree.
Organic growth in Brazil (formerly Tolls) was 18%, propelled by success in markets beyond tolling such as parking and by a robust market for branded insurance products. This achievement suggests the possibility that FLT is now able to tap onto a much larger TAM given all the possibilities in cross/up-selling related products and services. In the first quarter, roughly 60% of FLT’s five million consumer tagholders used the app, leading to a 15% attach rate of insurance policy add-ons, proving that cross-selling momentum is picking up. The success FLT has had in Brazil in encouraging app use and coordinating with channel partners to reach consumers there gives me hope that they will be able to do the same in other EV markets.
EV
FLT’s foray into the EV market deserves its own section. During the call, executives highlighted the success of their 3-in-1 offering in the United Kingdom, where the revenue per vehicle from EVs has surpassed that of ICE vehicles. While this is an encouraging development, it is essential for FLT to demonstrate the sustainability of unit economics at this level to instill confidence in the market regarding EV as a growth avenue rather than a risk. I find FLT’s strategy of entering the consumer EV market appealing as it leverages the company’s existing infrastructure and technology investments. A positive outlook suggests that if FLT successfully enters the consumer market, it can unlock cross-selling opportunities akin to those experienced in Brazil, where initial toll tag offerings expanded to include parking, food, insurance, and more.
M&A catalyst
While FLT’s organic performance has been solid, I believe that M&A will continue to be a key growth driver for the company and the stock. Management has stated its intention to streamline operations, which may include selling off non-essential assets. This is fantastic because it simplifies the fundamentals for investors and makes the equity story simpler for the market. Although management has said that it is focusing on paying down debt with its capital allocation priorities, I remain bullish because I believe that management has a proven track record of successfully integrating acquisitions. I’m keeping my fingers crossed that FLT will be able to find more acquisition targets in its higher-growth verticals.
Summary
In summary, I maintain a buy rating for FLT based on positive indicators in the Fleet segment and attractive growth opportunities in its Brazil segments. The company’s strong performance in 1Q23, along with management’s strategic initiatives, reinforces my confidence in FLT’s future prospects. The re-segmentation of the business and successful monetization of its EV solutions demonstrate management’s ability to adapt and innovate. Despite potential macro pressures, I believe FLT has the resilience to weather challenges and leverage opportunities through opportunistic M&A. Specifically, for the Fleet segment, I expect it to accelerate, supported by stable demand and improving performance. FLT’s entry into the EV market and its success in the UK further enhance growth prospects, however sustainable profit unit economics are required to convince the market.
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