M&A And Mastercard Tie-up Will Boost Corporate And Vehicle Payments

Key Takeaways

• Strategic M&A and partnerships, including with Mastercard, aim to expand Corporate Payments, potentially boosting revenue and impacting margins positively through increased scale.
  
• Expanding U.S. sales efforts and exploring divestitures for liquidity could drive revenue growth and enhance market penetration and returns on invested capital.
  
• Macroeconomic uncertainties and revenue volatility, coupled with policy risks and segment challenges, may hinder consistent growth and impact net margins.

Catalysts

Operates as a payments company that helps businesses and consumers manage vehicle-related expenses, lodging expenses, and corporate payments in the United States, Brazil, the United Kingdom, and internationally.

• Corpay's strategic M&A activities, including a partnership with Mastercard and a minority investment in Avid, aim to expand their Corporate Payments business. This could add 2-3% incremental revenue growth to the cross-border business starting next year, impacting overall revenue and potentially margins through increased scale in the Corporate Payments space.
  
• Recent organic revenue growth in Corporate Payments was up 19% due to solid spend volumes, with new channel partnerships contributing significantly. This ongoing growth is expected to sustain strong revenue performance, supporting earnings and margins through increased transaction volumes.
  
• Corpay's Vehicle Payments business revenue in Brazil showed 22% organic growth from app-based strategies and product offerings. This positions the segment for continued expansion, likely enhancing revenue growth and profitability due to increased customer engagement and market penetration.
  
• The company is exploring potential divestitures of three noncore segments, which could generate up to $2 billion in liquidity. This would provide financial flexibility for further investment in high-growth areas, potentially enhancing return on invested capital and impacting net margins positively.
  
• Corpay's initiative to increase U.S. sales, including new cross-sell teams and a revitalized marketing campaign, is aimed at driving future revenue growth. These efforts are expected to improve market penetration and overall earnings growth through expanded customer acquisition and retention strategies.

Corpay Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Corpay's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.3% today to 30.8% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $23.79) by about May 2028, up from $1.0 billion 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 21.0x on those 2028 earnings, down from 22.9x today. This future PE is greater than the current PE for the US Diversified Financial industry at 14.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.66%, as per the Simply Wall St company report.

Corpay Future Earnings Per Share Growth

Risks

• The company's revenue was impacted by approximately $6 million of unfavorable fuel spread revenue in Q1, which could suggest volatility risks in fuel prices affecting future revenue.
  
• Cross-border revenue was adversely affected by U.S. goods-based volumes softening due to tariff policy uncertainty, potentially impacting earnings growth if such policies continue to fluctuate.
  
• The macroeconomic environment is indicated as being highly uncertain, which could lead to unforeseen impacts on revenue forecasts for the rest of 2025.
  
• While there are growth opportunities, the company's organic revenue in the Vehicle Payments segment experienced a decline of 3% in the U.S., which could indicate challenges in maintaining consistent revenue growth in this segment.
  
• The effective tax rate increased from 24.7% to 25.5% year-over-year, suggesting potential pressures on net margins if this trend continues.

Valuation

• The analysts have a consensus price target of $397.595 for Corpay 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 $445.0, and the most bearish reporting a price target of just $339.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.4 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $326.29, the analyst price target of $397.6 is 17.9% 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.