Business Transactions

In today’s fast-paced financial world, the business-to-business (B2B) payments area is increasingly important. This sector is key for helping businesses handle their financial transactions smoothly, connecting different types of businesses and their unique financial needs.

The leading companies in B2B payments are distinguished by their adept integration of cutting-edge technology and innovative payment strategies, driving efficiency and security in business transactions. Despite the fluctuating economic landscape, the demand for robust B2B payment solutions is accelerating. This resilience is attributable not only to the sector’s growth in flourishing economic conditions but also to its critical role in sustaining business operations during challenging financial periods.

Looking ahead, the B2B payments field is set to grow even more. This growth is driven by the accelerating shift towards digital transactions, the globalization of business operations, and the increasing complexity of international trade. All these factors point to a growing need for advanced payment systems that seamlessly manage complex business financial needs, ensuring the sector’s sustained expansion and relevance.

We will present one of the leading companies in this industry, but first, let’s delve into a short update on the economy and markets, and the Smart Investor calendar.

 

Economy and Markets: Looking Forward

Several important reports are scheduled to be published in the next few days.

  • Later today, the U.S. Census Bureau will publish December’s Retail Sales report, which provides information on how much money consumers are spending on various durable and non-durable goods. Since the report tracks the amount of spending in an economy, it helps to gauge the economy’s health and consumer spending habits, as well as the level of the buy-side inflation pressures.

  • Also today, the Federal Reserve will release December’s Industrial Production report, which shows the volume of production of U.S. industries like manufacturing, mining, and utilities. Although industrial production accounts for a smaller portion of economic activity than services, its sensitivity to consumer demand and interest rates makes it a leading indicator of GDP growth and economic performance.

  • On Friday, the University of Michigan will publish the preliminary readings of January’s Michigan Consumer Sentiment Index and UoM 5-year Consumer Inflation Expectations reports. These reports portray the results of a monthly survey of consumer confidence levels and consumers’ views of long-term inflation in the United States. The level of confidence affects consumer spending, which contributes about 70% of the U.S. GDP. The inflation expectations index is used as a component of the Fed’s calculations of the Index of Inflation Expectations.

As for the stock calendar, the Q4 2023 earnings season for Smart Investor Portfolio companies is in full swing, with the quarterly results of Taiwan Semiconductor (TSM), Crane NXT (CXT), General Electric (GE), General Dynamics (GD), Amphenol (APH), and Textron (TXT) to be published in the next few days.

The ex-dividend date for General Dynamics (GD) is January 18th.

 

Today, we are adding the stock of an industry leader in business payment solutions, one that features stellar profitability and robust earnings growth.

To make room for this valuable addition, we are letting go of a global insurance and reinsurance giant with strong finances and robust profitability, but which may struggle to maintain its past levels of earnings growth in the coming quarters.

 

New Addition: FLEETCOR Technologies (FLT)

FLEETCOR Technologies, Inc. is a business payments company that provides businesses with solutions to manage and control their expense-related purchasing and vendor payment processes. FLT is one of the leading global B2B (business-to-business) payments companies.

The company works through four main business segments: Corporate Payments, Lodging Solutions, Vehicle & Mobility Payments, and Brazil.

The Corporate Payments segment specializes in helping businesses of all sizes simplify the way they make business payments, providing solutions that increase productivity, minimize errors and fraud, and lower processing costs, while making compliance easier, reducing foreign exchange volatility impact, and simplifying complex back-office challenges. The segment offers a full suite of accounts payable (AP) and vendor payment solutions, including AP automation, cross-border payments, commercial cards, and a small business bookkeeping platform. This segment is responsible for 27% of FLT’s total global revenues.

The Vehicle & Mobility Payments segment helps businesses manage their vehicle expenses. This segment, originally the core of FLEETCOR’s business, is the source of 38% of the company’s total annual revenue. It provides companies with a comprehensive suite of expense management solutions, which include vehicle fleet management and control, as well as unified platforms for charging, fuel, tolls, insurance, parking, and more.

The Lodging Solutions has been under the Vehicle & Mobility Payments segment and was separated into an autonomous business unit in 2023. It provides a full suite of technology solutions that help businesses book, manage, and pay for workforce travel. The company sources 15% of total revenues to the LS segment.

Geographically, FLEETCOR’s largest market is the U.S., responsible for 61% of revenue. However, the company is working to expand its geographical reach, with the largest end market being Brazil, contributing 13% of revenue and registering the fastest growth. That is why Brazil has been separated into its own segment, which has broadened from a specific toll-focused solution to a broader vehicle payments platform. FLT holds a leading position in Brazil’s electronic toll payment market.

The company was founded in 2000 in Atlanta, Georgia, as a small, regional fuel card business. In 2010, FLEETCOR went public on the New York Stock Exchange (NYSE) under the ticker FLT with a market valuation of $335 million.

Today, FLT is a large-cap firm and a member of the S&P 500 (SPX) index with a market capitalization of $20.5 billion, annual revenues of $3.4 billion (in 2022), and a workforce of almost 10,000. FLEETCOR’s portfolio of brands automates, secures, digitizes, and manages payment transactions for over 800,000 business clients and 4 million merchants and vendors across more than 150 countries in North America, Latin America, Europe, and Asia Pacific.

A large part of FLEETCOR’s fast expansion can be attributed to its evolving mergers and acquisitions (M&A) strategy. FLT has acquired 24 companies, with all buyouts serving one or more of the company’s strategic goals: (1) entering new markets or extending an existing market position; (2) extending the existing technological capabilities and creating new technological advances; and (3) accelerating profit growth. After a pause during the initial phases of the Covid-19 crisis, during 2021 and 2022, FLEETCOR acquired 13 companies in the U.S., U.K., and Brazil, and made several strategic investments as well. In 2023, the company made three important acquisitions, purchasing a UK-based cross-border payments provider Global Reach Group, and two U.S. companies: a cloud-based electric vehicle (EV) charging software platform Mina, and a global provider of digital parking payment solutions PayByPhone.

Due to this large number of completed acquisitions, FLEETCOR has seen its debt rise considerably. However, apart from the high debt-to-equity ratio, the company boasts robust financial health. FLT’s debt is relatively highly rated when contrasted with its FinTech peers by the world’s leading credit-rating agencies: “BB+“ at S&P Global Ratings, and “Ba1” at Moody’s.

The company’s investors are not overly concerned about debt ratios, since FLT’s industry-beating capital efficiency, profitability, and fast earnings growth immensely strengthen its ability to pay down debts while enhancing shareholder returns.  As a side note, while FLEETCOR technically belongs to the Financial sector, as a Financial Technology (FinTech) company its performance metrics are better compared to the faster-growing and higher-margin Software industry.

As for capital efficiency, while the company’s high Return on Equity (ROE) of 36% is skewed by its high debt ratio and thus less meaningful, its Return on Assets (ROA) of 6.6% and Return on Invested Capital (ROIC) of 9.3% are in the top third among the ratios for comparable companies.

What makes FLEETCOR stand out among its competitors is its best-in-class profitability. Its gross margin of 77.9%, EBITDA margin of 50.1%, operating margin of 43.3%, FCF (free cash flow) margin of 28.6%, and net profit margin of 25.7% rank among the top 5% of its peers.

In the past three years, FLT’s revenues have increased at a CAGR of 14.5%, while its earnings-per-share (EPS) rose by 15.4%. On November 8, 2023, the company shared its Q3 2023 financial results, featuring another strong beat on revenue and earnings. In fact, the company has surpassed EPS estimates in all quarters for which these estimates were available.

During Q3, revenues increased 10% year-on-year, driven by fast growth in the Corporate Payments and Brazil segments. EBITDA increased 13%, while adjusted EPS was up 6% year-over-year. The results incorporated the impact of divestment from its Russian subsidiary, which the company completed by August 2023. As a result of the stronger-than-expected Q3 results, the company’s management raised its revenue and adjusted net income per share guidance for Q4 2023 to reflect growth by 10% and 11% year-on-year. In addition, the company provided an outlook into the 2024 revenue expectations, penciling in 9%-11% organic revenue growth for the full year.

Within the earnings call, the management updated that during Q3, FLT performed buybacks for $530 million, completing its stock repurchase plan initiated in 2016, which included repurchase of 34% of its outstanding shares for a total amount of $6.4 billion. With its outstanding profitability and annual FCF generation of over $1 billion, FLEETCOR has the capacity for continued shareholder compensation through buybacks as well as for additional strategic acquisitions.

As a result of the continued excellent financial results, its stock has risen by almost 45% in the past 12 months, far outpacing all its competitors in the business payment processing industry. These gains include a significant downfall during the fall months, which came on the back of general market weakness, and the subsequent 30% surge from its end-of-October lows.

At first glance, FLEETCOR’s stock valuations look expensive, with its TTM P/E of 22.3 and a Forward P/E of 21.4 about twice the averages for the Financial sector. However, FLT is a FinTech company, and should not be compared to banks and insurance firms. When juxtaposed with its competitors such as Shift4 Payments (FOUR), Global Payments (GPN), Fiserv (FI), and WEX (WEX), it comes at the bottom of the valuations range, presenting a value opportunity among B2B payments firms.

In the past several months, several TipRanks-scored top Wall Street analysts upgraded their outlook on FLT, raising their price targets for the stock. The top-rated analysts now see an additional upside of 11% for the stock over the next 12 months. Given the company’s strong fundamentals and performance, it may surprise even further on the upside.

FLEETCOR Technologies carries a TipRanks Smart Score rating of  8/10 (“Outperform”) with a “Strong Buy” recommendation:

FLEETCOR is a highly profitable, fast-growing company addressing lucrative and expanding markets with high operational efficiency. As a financial tech company, it may encounter higher-than-average volatility at times, but in the long term, we view it as well-positioned to deliver strong stock performance, considering its consistently great financial results and optimistic earnings growth outlook. We therefore view it as a valuable addition to the Smart Investor portfolio.

 

New Deletion: Everest Group (EG)

Everest Group Ltd. is a global insurance and reinsurance provider. Through its subsidiaries, the company offers a range of property and casualty reinsurance, insurance products, and related services. It offers insurance coverage in areas such as casualty, energy, specialty, credit, and financial lines. EG is one of the world’s largest reinsurers, offering property, casualty, marine and aviation, surety, credit, and other types of reinsurance through a global network of affiliates. Headquartered in Hamilton, Bermuda, Everest offers its services to customers in more than 100 countries; however, the majority of the company’s revenue is derived from its U.S. Reinsurance operations.

Everest is a financially healthy company with a low debt and a robust level of liquidity, carrying high credit ratings. EG has displayed strong profitability metrics, including strong earnings growth. In its latest quarterly report, the company far outpaced analysts’ revenue and EPS estimates.

However, the currents that have led to thicker-than-expected bottom lines in the previous two quarters seemed to have weakened a little in the last quarter of 2023. Moreover, looking forward the company is expected to see lower rates of earnings growth. That is because the main factors leading to a surge in net earnings last year were the absence of major insurance events (catastrophes such as hurricanes, floods, fires, etc.), and the high interest rates which led to outsized income on its investment portfolio. The first factor is pure luck, and statistically, this catastrophe-free run cannot be expected to continue. Meanwhile, the Federal Reserve is slated to start reducing interest rates sometime this year, which will compress investment income.

While Everest Group remains strongly positioned to enjoy healthy long-term growth, caution is required regarding profit expansion in the next few quarters. The market hesitance about EG’s ability to maintain the past quarter’s rate of EPS growth is reflected in the company’s share performance, as Everest’s stock has given back a large part of the gains it made due to the strong Q3 results.

While we may reevaluate the company in the future, for now, we believe it is appropriate to sell the stock.

 

Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

Our exclusive club’s member count remained unchanged at five, as it lost its newest member, SMCI, but regained one of the veteran Winners, ORCL.

The five champions now include GE, AVGO, ANET, CDW, and ORCL.

However, Super Micro Computer (SMCI) hasn’t fallen far from the threshold: with 28.3% since purchase, it is now the second runner-up to make a comeback. The first in line to enter the exclusive club’s ranks is now Molina Healthcare (MOH), which has risen by 29.4% since its purchase. Will one of them be able to close the gap, or will someone else outrun them to the finish line?

 

What’s Next?

Our next commentary will come out on Wednesday, January 24th, before the market opens.

Until then – we wish you a world of investment success!

Access the full Smart Investor Archive, including all historical stock picks and original newsletters.

 

Portfolio Changes

New Portfolio Additions

Ticker Date Added Current Price
FLT Jan 17, 24 $283.99

New Portfolio Deletions

Ticker Date Added Current Price % Change
EG Oct 4, 23 $369.23 -1.06%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
GE Jul 27, 22 $127.97 +129.01%
AVGO Mar 22, 23 $1114.96 +76.72%
ANET Jun 21, 23 $253.26 +67.16%
CDW Jun 29, 22 $220.72 +39.63%
ORCL Dec 21, 22 $106.57 +30.76%
MOH May 3, 23 $385.04 +28.55%
SMCI Nov 8, 23 $326.31 +27.76%
WCC Sep 14, 22 $169.48 +26.33%
VRTX Aug 2, 23 $437.49 +25.81%
ITT Oct 18, 23 $117.97 +23.52%
GD Dec 22, 21 $250.65 +23.01%
CHKP Jul 19, 23 $156.10 +22.60%
STLA Sep 6, 23 $21.74 +19.71%
ULTA Nov 15, 23 $476.01 +17.50%
PH Oct 11, 23 $460.75 +15.82%
AMAT May 31, 23 $153.76 +15.35%
ACN Aug 16, 23 $354.56 +15.25%
JBL Jul 5, 23 $125.41 +14.85%
CI Jul 12, 23 $306.94 +14.24%
APH Aug 9, 23 $96.14 +8.71%
TSM Aug 23, 23 $101.67 +8.40%
UNH Apr 19, 23 $519.15 +6.78%
EME Nov 1, 23 $220.28 +6.74%
MCK Dec 13, 23 $488.50 +5.70%
CXT Oct 25, 23 $54.52 +5.33%
AIT Dec 6, 23 $168.12 +2.05%
CNC Jan 10, 24 $78.72 +0.91%
TXT Nov 29, 23 $77.55 +0.83%
EA Nov 22, 23 $137.15 +0.27%
LW Apr 13, 23 $108.32 +0.14%
STM Sep 13, 23 $43.55 -1.40%
HUM Dec 20, 23 $438.79 -5.35%
DB Jan 3, 24 $12.83 -5.73%
ENS Dec 27, 23 $97.19 -6.29%

 

Disclaimer

The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.