Digital Transformation And Global Expansion Will Improve Future Mobility Solutions

Key Takeaways

• Expansion and acquisitions are expected to drive growth through enhanced services, client retention, and operational efficiencies via digitization and automation.
  
• New products and digital strategies aim to optimize margins, improve client relations, and bolster cash flow, supporting earnings growth.
  
• Global trade issues and currency fluctuations may increase costs and volatility, impacting Element Fleet Management's revenue, net margins, and profitability.

Catalysts

Operates as a fleet management company primarily in Canada, the United States, Mexico, Australia, and New Zealand.

• Element Fleet Management is focused on expanding its global growth strategy, leveraging recent acquisitions and investments that are expected to enhance revenue through increased service offerings and improved client retention. This is likely to drive revenue growth and potentially higher net margins due to efficiencies gained via digitization and automation.
  
• The establishment of a strategic sourcing presence in Asia and the acquisition of Autofleet are initiatives aimed at operational efficiency and innovation, which are expected to improve net margins by optimizing mobility solutions and expanding service offerings.
  
• Element's rollout of new product offerings such as Element Risk Solutions and a digital driver app is expected to open new revenue streams and strengthen relationships with existing clients, supporting both revenue growth and potential improvements in operating margin.
  
• The transition to a digital-first approach with an emphasis on technology and automation investments is poised to enhance operational efficiency and client service capabilities, which could improve net margins by reducing costs and increasing revenue per client.
  
• Element's capital-light strategy, increased syndication revenue, and potential improvements in syndication yield are expected to bolster cash flow and expand adjusted operating income, supporting growth in adjusted earnings per share and free cash flow.

Element Fleet Management Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Element Fleet Management's revenue will decrease by 12.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 23.0% today to 52.1% in 3 years time.
• Analysts expect earnings to reach $572.9 million (and earnings per share of $1.35) by about March 2028, up from $379.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.7x on those 2028 earnings, up from 20.6x today. This future PE is greater than the current PE for the CA Commercial Services industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 4.05% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

Element Fleet Management Future Earnings Per Share Growth

Risks

• Global trade issues and tariffs could impact the supply chain and increase costs, leading to volatility that may affect Element Fleet Management's revenue and net margins.
  
• The appreciation of the U.S. dollar against other currencies like the Mexican peso could negatively impact net revenue growth when translated back to U.S. dollars, affecting earnings.
  
• Increased operating expenses due to strategic investments could pressure net margins in the short term, if revenue growth does not outpace these expenses.
  
• Potential delays or disruptions in vehicle manufacturing from OEMs due to tariff impacts could adversely affect origination volumes, thus impacting future revenue and earnings.
  
• Higher funding costs and interest expenses tied to preferred share redemptions and transactional setups, such as the AutoFleet acquisition, may limit net profitability and cash flow growth in the near term.

Valuation

• The analysts have a consensus price target of CA$33.438 for Element Fleet Management based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$40.0, and the most bearish reporting a price target of just CA$26.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.1 billion, earnings will come to $572.9 million, and it would be trading on a PE ratio of 23.7x, assuming you use a discount rate of 8.4%.
• Given the current share price of CA$27.73, the analyst price target of CA$33.44 is 17.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.