We initiated a position in FleetCor Technologies (FLT, Financial), a global provider of fleet and workforce payment solutions. FleetCor is primarily focused on business-to-business (B2B) payments, and operates across five spend categories: Fuel, Lodging, Tolls, Corporate Payments, and Gift. In the most generalized terms, FleetCor simplifies the way businesses manage and pay for expenses. B2B payments are evolving from paper checks and ACH (which are still the most common B2B payments methods2) to electronic payment delivery (which can take many forms), and FleetCor is at the forefront of this transition, benefiting from the continued secular shift to electronic payments.
The Company uses both proprietary and third-party networks (MasterCard in the U.S., Visa in the U.K. and Europe, as well as others) to deliver its payment solutions. Its customers tend to have recurring revenue models and specialized networks which create barriers to entry for competition to compete at any sort of scale. This can be evidenced by the Company’s near duopoly in their largest product category - its fuel payment product line. In addition, the solutions tend to be specialized for specific spend categories (fuel, lodging, etc.) and/or specific customer segments, for example the long-haul transportation industry. We also note that MasterCard and Visa have stated priorities to penetrate B2B payments aggressively, and both of these major payment processors view FleetCor as a useful partner in expanding their reach into this area.
Among Fleetcor’s five primary spend categories, the Fuel Payment product is the largest segment making up about 45% of total revenues and customers/partners of this segment include major oil companies, fuel marketers, and businesses with small- to medium-sized fleets. This segment offers customers discounts to the retail price of fuel and helps control unauthorized spending; this is a service to both the fuel provider and to the fuel consumer. While we view this core segment as an attractive business, FleetCor has made a concerted effort to diversify the overall business into related categories; this fuel segment made up as much as 70% of the business only a few years ago. The Lodging Payment product, one of the smaller segments, functions similarly to the Fuel product and often serves a customer base that overlaps with the Fuel program. In 2016, FleetCor entered the Toll Payments line through its acquisition of STP in Brazil. This acquisition brought the 2nd largest toll company in the world under the FleetCor umbrella, and its 5 million toll users. The Corporate Payments product optimizes corporate spending for businesses offering the use of virtual cards to enhance security and increase automation and savings. Finally, the small Gift payment product – a gift card management service – rounds out its business segments. In total, the Company has generated strong double-digit growth in the non-fuel products, both organic and through acquisition, contributing to the ongoing diversification away from fuel card segment.
FleetCor has developed a growth algorithm to grow through M&A, or what the Company terms “build, buy, partner” whereby it will grow through a combination of building its existing infrastructure organically by investing in sales and marketing, buying businesses through either small tuck-in acquisitions or the occasional large acquisition, or partner with large third parties or major oil companies in order to enter markets the Company currently does not have a presence in today. Fleetcor targets to be in as many of the top 25 GDP markets around the world as is practical, and it will do this primarily through its M&A strategy. More recently, FleetCor has developed additional growth drivers coined “Beyond Fuel” and “Beyond Toll.” These initiatives essentially are a means by which it uses its existing product categories of fuel and toll and offer ways to get more spend from existing customers through these categories. In the Beyond Fuel initiative, Fleetcor is expanding the revenue per transaction of existing customers in the U.S. and U.K. by expanding the purchases it can offer on their fuel cards. The Company still offers great control for management teams over what can be purchased, but it is opening up the spend to construction supplies, service, maintenance, etc. for its fleet customers while at the same time still preventing unauthorized spending on the card. Similarly, Beyond Toll is for the Company’s toll product in Brazil, where the toll tag has been expanded to be read by scanners in parking garages, gas stations, and even fast food restaurants.
FleetCor operates in the very attractive electronic payments space and currently trades at a valuation level below that of our existing payment names in the portfolio yet growing at similar levels. The Company generates $1 billion in free cash flow annually, providing ample cash to continue its build, buy, partner strategy. It has laid out 2019 targets for +9-11% organic revenue growth and +15-20% EPS growth achieved through organic growth initiatives, accretive acquisitions, and occasional share repurchases. As FleetCor pushes to double the size of its business every four years, we believe the Company is well positioned to be a healthy growth name in an attractive industry, well capable of achieving that goal.
From David Rolfe (Trades, Portfolio)'s Wedgewood Funds fourth-quarter 2019 shareholder letter.
