40.9% Upside On Under-the-Radar Stock
Investment Alert: Buy WEX Under $180/share
Disclaimer: Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.
Key Points
- WEX is an undervalued company that offers a range of services, such as fuel cards, cross-border payments for online travel agencies, and health savings accounts.
- WEX has maintained revenue growth over the past 10 years, except for a 9% decline in 2020 due to the pandemic, with revenues rising by 19.1% in 2021 and 27.0% year over year in 2022.
- WEX’s balance sheet shows management acting prudently, with cash rising from $361 million in 2013 to just under $1 billion in 2022, and long-term debt being manageable given the health of the underlying business
Investment Thesis
Fuel cards aren’t the first thing to spring to mind when scouring the investment world for opportunities. But sometimes the big money is made where the crowd isn’t looking, and WEX fits the bill in that respect.
WEX is a New York Stock Exchange company that you probably haven’t heard of before. It offers a range of services, such as WEX Fleet that provides fuel cards and data & telematics offerings to vehicle fleet customers. The company partners with companies such as GasBuddy, OnDeck Capital, and Chevron.
Another division, WEX Virtual, facilitates cross-border payments for online travel agencies. It provides virtual cards that enable online travel agencies to automate back-end accounting practices. Customers have included HotelTonight, Expedia, and Priceline.
A further segment is WEX Health Cloud, which helps to administer a range of health savings accounts, flexible spending accounts, defined-contribution plans, wellness plans, and transit plans. This division has partnerships with companies such as Fifth Third Bancorp, Paychex, HSA Bank, and Discovery Benefits.
WEX has clearly cemented its status as a trusted provider among top echelon customers and partners, but is the stock a buy?
Billion Dollar Fund Bets Big on WEX
We found it intriguing that Impactive Capital, a hedge fund with $2.2 billion in assets under management bet 15% of its portfolio on this one under-the-radar stock. The only other stock in its portfolio that commands such a prominent position is Asbury Automotive Group.
As we dug into the numbers, it became clear what makes the investment thesis so compelling.
First off, and most importantly, WEX is significantly undervalued. Running a discounted cash flow forecast analysis revealed upside of 40.9% to fair value of $248 per share at the time of research.
The more you jump down the WEX rabbit hole, the more compelling the investment thesis. For example, over the past 10 years, the only year the company didn’t grow revenues was in 2020 – when transportation essentially ground to a halt. And even then sales fell by “just” 9.0%. The last couple of fiscal years have more than made up for that dip with revenues rising by 19.1% in 2021 and 27.0% year over year in 2022.
Further examining the past ten years, we saw revenues popping from $717 million in 2013 to $2.3 billion in 2022. Operating income has been on a tear too over the past 7 years rising from $193 million in 2016 to $606 million in 2022.
Not only is the P&L looking good, but the balance sheet is showing management acting prudently too. Cash has risen from $361 million in 2013 to just under $1 billion in 2022. While long-term debt sits at $2.6 billion, it’s quite manageable given the health of the underlying business.
If there were one big knock on the company it’s that the firm’s 37.9x P/E is high. That might be in part due to Barclay’s raising its price target on the firm to $245 last month.
The upside remains compelling in spite of the high P/E though. After all if earnings double the P/E is cut in half. The bottom line is we see upside of over 26% in this under-the-radar stock that has a proven track record.
