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.
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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.
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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.
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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.