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

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
RELATED FAQS
  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 >>
COMPANIES IN THIS ARTICLE
Trading Center