Company Overview: WEX Inc. is a provider of corporate payment solutions. The Company operates through three segments: Fleet Solutions, Travel and Corporate Solutions, and Health and Employee Benefit Solutions. The Fleet Solutions segment provides customers with payment and transaction processing services designed for the needs of commercial and government fleets. The Travel and Corporate Solutions segment focuses on the complex payment environment of business-to-business payments, providing customers with payment processing solutions for their corporate payment and transaction monitoring needs. The Health and Employee Benefit Solutions segment provides healthcare payment products and software as a service consumer directed platforms, as well as payroll related benefits to customers in Brazil. The United States operations include the Company and its subsidiaries WEX Bank, WEX FleetOne, Electronic Funds Source LLC and WEX Health.


WEX Details

Product Innovation Led to Business Growth: WEX Inc. (NYSE: WEX) is a leading service provider of corporate payment solutions and operates through three business segments- (a) Fleet Solutions, (b) Travel and Corporate Solutions, and (c) Health and Employee Benefit Solutions. 

The Fleet Solutions segment provides customers with fleet vehicle payment processing services specifically designed for the needs of commercial and government fleets. Fleet Solutions revenue is earned primarily from payment processing, account servicing and financing fees. As per the Management, WEX fleet cards are accepted at higher than 90% fuel locations across the United States and Australia and have wide acceptance across Europe. The Travel and Corporate Solutions segment focuses on the complex payment environment of business-to-business payments, providing customers with payment processing solutions for their corporate payment and transaction monitoring needs.

Looking at the financial performance, in FY18 (for the period ended on 31 December 2018), total net revenue stood at $1,492.64 million, up 19.64% from $1,248.58 million during FY17. Net profit for the company was recorded at $169.78 million, up 6.8% on y-o-y. Considering the past performance, WEX has delivered a CAGR of ~20.4% in revenue over the period of FY15 to FY18, while net profit witnessed a CAGR of ~18.5% during FY15 to FY18.

As key highlights during the third quarter of FY19, within the fleet segment, NA Fleet platform cloud migration was executed successfully, allowing for increased speed to market, stability, scalability and functionality. Under the travel and corporate segment, the internal processing platform reported hosting of more than $3.7 Billion in purchase volume on a run-rate basis. Within the health and employee benefits, solutions are being used by more than 50% of Fortune 1000 companies.

Going forward, the company believes that the long-standing strategic relationships, multi-year contracts and high contract renewal rates have contributed to the stability and recurring nature of the revenue base. The business offers a compelling value to its customers relative to the competitors, given the breadth and quality of the company’s products and services and a deep understanding of the customers’ operational needs. The company is going through the production process with machine learning fraud prevention capability. Financial Year 2019 is likely to see a 17% growth in top-line, whereas adjusted net income is expected to witness a growth in the range of 12-13%.


Past Financial Performance (Source: Thomson Reuters)
 
Q3FY19 Operational Highlights for the period ended 30 September 2019: WEX recently declared its third-quarter FY19 results, wherein the company reported revenue at $459.96 million, up 19% from the previous corresponding quarter, driven by double-digit growth in each of the segments. During the quarter, the company reported a successful migration of the North American fleet platform into the cloud platform. The business witnessed a 20% y-o-y volume growth across travel and corporate payments. The period was also marked by an impressive momentum in U.S. Health business, reporting strong growth of 73% on y-o-y basis, driven by the addition of new business and discovery benefits acquisition. Within the health and employee benefits segment, the company witnessed more than 185 enhancements during the October product release.


Q3FY19 Highlights (Source: Company Reports)
 
Cost of Services: Within the cost of sales, the business included several expenses like processing costs, service fees, provision for credit losses, operating interest and depreciation & amortization. Processing costs consist of expenses related to the processing transactions, servicing customers and merchants and cost of goods sold related to hardware and other product sales. Service fees included costs from third-party networks utilized to deliver payment solutions, followed by the other third parties, which are utilized in performing services directly related to revenue generation. Cost of goods sold during the period came in at $165.679 million, representing 36.02% of the total revenue as compared to $146.838 million in the previous corresponding quarter, which came in at 37.98% of the total revenue.

 General and Administrative expenses include compensation and related expenses for executive, finance and accounting, other information technology, human resources, legal and other corporate functions. This segment also includes corporate facilities expenses, certain third-party professional service fees and other corporate expenses. During the quarter, general and administrative expenses came in at $65.423 million, denoting 14.22% of the total revenue as compared to $51.126 million in Q3FY18, constituting 13.22% of the total revenue. 

Sales and marketing expenses are primarily related to compensation, benefits, sales commissions and related expenses for sales, marketing and other related activities. The company reported sales and marketing expenses at $73.689 million, representing 16.02% of the total revenue as compared to $54.611 million, representing 14.13% of the total revenue in the previous corresponding period. The increase in sales and marketing expenses was related to higher relative commission payments to partners and an increase in personnel-related costs resulting from higher volumes and financial performance.

Segment-wise performance: During the third quarter of FY19, the company delivered total revenue of $277.526 million from its Fleet Solution segment as compared to $249.569 million in Q3FY18. Travel and Corporate Solutions reported a total revenue of $99.128 million as compared to $82.81 million in the previous corresponding period. Revenue from Health and Employee Benefits Solutions came in at $83.309 million as compared to $54.238 million in Q3FY19. Fleet Solutions business reported adjusted operating income of $133.348 million as compared to $112.952 million in Q3FY18. The Travel and Corporate Solutions business derived $47.356 million of adjusted operating income as compared to $39.377 million in the previous corresponding period. WEX reported total operating income on an adjusted basis at $202.131 million as compared to $165.466 million in Q3FY18.


Q3FY19 Segment Highlights (Source: Company Reports)

Nine-months Operational Highlights for the Period ended 30 September 2019: During the nine months of FY19, the company reported top-line at $1,283.646 million as compared to $1,111.443 million in the previous corresponding period. The cost of service came in at $479.685 million as compared to $410.358 million in the previous corresponding period. General and administrative expenses, during the period stood at $206.075 million as compared to $154.148 million in the previous corresponding period. Sales and marketing expenses, during the period, came in at $210.639 million as compared to $168.849 million in 9MFY18. The company reported a net income of $90.739 million as compared to $147.038 million in 9MFY18.

9MFY19 Financial Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 53.79% of the total shareholding. The Vanguard Group, Inc. and Wellington Management Company, LLP hold the maximum interests in the company at 9.32% and 9.15%, respectively.


Top 10 Shareholders (Source: Thomson Reuters)

Key Metrics: The company reported decent numbers in Q3FY19, wherein gross margin stood at 66.5%, higher than its industry median of 47.2%. The operating margin during Q3FY19 stood at 25.7%, higher than the industry median of 12.1%. The business reported a net margin of 9.2% in Q3FY19, higher than the previous quarter of 7.2% and the industry median of 6.7%. ROE at 0.8% was in-line with the previous quarter.


Key Metrics (Source: Thomson Reuters)


Key Valuation Metrics (Source: Thomson Reuters)

Guidance: As per the Q4FY19 guidance, the company expects revenue to come in the range of $452 million to $462 million. Adjusted net income is expected to come between $110 million to $114 million, a growth of ~20% to ~24% on pcp. Adjusted net income earnings per diluted share is estimated between $2.51 to $2.61. The company expects domestic fuel prices at ~$2.76/ gallon. As per FY19 full-year guidance, the company expects a ~17% y-o-y growth in revenue at $1,736 million to $1,746 million. Adjusted net income for FY19 is expected between $399 million to $403 million, followed by adjusted net income earnings per diluted share at $9.10 to $9.20. The business expects domestic fuel prices at $2.79/ gallon, while adjusted net income tax is calculated at 24.5% to 25.5% for the full year of FY19.

Valuation Methodologies:
Method 1: Price to Earnings Multiple Approach 

Price to Earnings Based Valuation (Source: Thomson Reuters)

Method 2: Price to Cash Flow Multiple Approach

P/Cash Flow Based Valuation (Source: Thomson Reuters)
Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: The stock ended the trading session at $196.99, with a market capitalization of $8.53 billion. The stock has generated a negative return of 4.369% and 1.799% in the last three months and six months, respectively. The company offers a diversified set of products and services, including security and purchase controls, which allows the clients for better strategic relationships and enhance management of their vehicle fleets. The business witnessed progress in 2019 across all the major verticals, which goes hand in hand with the company’s strategic pillars of growing market share, penetrating further into adjacent markets and diversifying the product portfolio. The above strategies are expected to result in a more balanced business with a stronger growth profile in the coming years. The company will continue to strengthen the bedrock of its business – WEX’s superior industry-leading technology, continuing the transition shifting to more of the technology into the cloud, including a cloud-first development methodology. Considering the aforesaid facts, we have valued the stock, using two relative valuation methods, i.e., Price to Earnings multiple, and Price to Cash Flow multiple, and arrived at a target price of lower double-digit growth (in % term). Hence, we recommend a “Buy” rating on the stock at the closing market price of $196.99, up 0.2% on 11 December 2019.

 
WEX Daily Technical Chart (Source: Thomson Reuters)

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