Closed-loop systems can be licenses to print money, and Wright Express (NYSE:WXS) certainly has ample room left to grow in the trucking fleet service market. That said, the volatility of fuel prices, the actions of competitors and the inertia of potential customers are all challenges to the company's potential growth. While Wright Express would be a very interesting growth stock at the right price, today's valuation is not so compelling.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers

A Closed Loop for Fueling up
Wright Express operates a business that is, in many respects, like a more specialized iteration of Discover Financial Services (NYSE:DFS) or American Express (NYSE:AXP). Wright operates a closed loop card network where customers (trucking fleets, mostly) get a card that they can use to pay for fuel. Wright Express pays the merchant and then collects from the customer. Since it's a charge card, there's much less credit risk involved and more certain payment schedules.

Wright Express rings the register at multiple points. The company charges a payment processing fee, reaps finance fee income and charges account servicing fees.

Fuel Prices a Good News-Bad News Situation
A sizable portion of Wright's revenue is based on a percentage of fuel prices, so when fuel prices decline, the company's revenue can follow. However, it's not quite that simple. For starters, the company hedges about 80% of its U.S. fuel exposure and that smooths out some of the volatility.

There's also a give-and-take between fuel prices and revenue opportunities. Lower fuel prices are good news for the company's trucking customers and lower prices can mean more trucks on the road and more fuel consumption.

SEE: A Beginner's Guide To Hedging

Plenty of Room to Grow
Wright Express probably has about 10% of its addressable market. While FleetCor (NYSE:FLT) is also in the business of providing payment services to commercial vehicle fleets, other major credit card companies like U.S. Bancorp (NYSE:USB) and Bank of America (NYSE:BAC) try to work with fleets to establish special exclusive relationships. That said, management at Wright Express has said before that as many as two-thirds of trucking fleets have no fleet card.

Wright's opportunity isn't just about North America either. The company already operates in Australia and is just starting to move into the European market. There are also other opportunities for growth outside of fleet services, including other corporate cards, prepaid cards and payroll cards.

SEE: How Productivity And Globalization Affect The Economy

The Bottom Line
I wouldn't be surprised if Wright Express got some interest from potential acquirers. I would think that a company like Discover or American Express could use it to further leverage its proprietary payment network, and Discover could use it to help support its international growth objectives. At the same time, I could see a company like U.S. Bancorp looking at Wright Express as an opportunity to boost its fee-based and payments businesses.

On its own, Wright Express is an interesting company but not such a compelling stock today. The company does well by many metrics, but the stock just isn't that cheap right now - particularly given the recent declines in fuel prices and ongoing competitive pressures in the small fleet trucking industry.

At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center