Expansion Into Cross-border Payments And European Markets Will Boost Future Competitiveness

Key Takeaways

• Strategic asset acquisitions and divestitures in corporate payments are expected to enhance revenue, net margins, and operational efficiency.
  
• Expansion into Europe and major investment in U.S. sales aim to boost market reach and drive significant revenue and earnings growth.
  
• Challenging macroeconomic conditions, FX risks, and competitive pressures in cross-border payments could hinder Corpay's revenue growth and market share expansion.

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 major focus on expanding its corporate payments business, including deepening its portfolio by shedding non-core assets and acquiring more corporate payments assets, is expected to drive revenue growth and potentially increase net margins due to the higher value and efficiency of core business operations.
  
• The company's investment in U.S. sales, with a planned improvement in sales production and scale in its field and Zoom sales teams, is projected to boost new bookings and overall sales growth, thereby positively impacting overall revenue and earnings.
  
• The launch and expansion of its payables business into Europe and the enterprise segment in the U.S. are strategic moves aimed at increasing its addressable market and potential customer base, which should contribute to sustained organic revenue growth.
  
• Corpay's introduction of a multicurrency account product that could significantly enhance its competitiveness in cross-border payments is an initiative expected to lead to revenue acceleration and possibly improvement in earnings due to the capture of a larger share of cross-border payment flows.
  
• Continued M&A activities, such as the acquisitions of Gringo and GPS, are anticipated to deliver significant cash EPS accretion, strengthening Corpay’s position in high growth markets like Brazil and possibly driving further earnings growth through expanded revenue streams and new market penetration.

Corpay Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Corpay's revenue will grow by 10.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 25.3% today to 31.5% in 3 years time.
• Analysts expect earnings to reach $1.7 billion (and earnings per share of $24.09) by about March 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 21.6x on those 2028 earnings, down from 23.5x today. This future PE is greater than the current PE for the US Diversified Financial industry at 16.2x.
• 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 7.68%, as per the Simply Wall St company report.

Corpay Future Earnings Per Share Growth

Risks

• The unfavorable macro environment, including weak international currencies and a much higher tax rate, could compress Corpay's print revenue by over $100 million and reduce cash EPS by about $1.20, impacting overall revenue and earnings.
  
• Significant foreign exchange (FX) risks and interest rate changes, such as the Brazilian FX rate being 10% lower, threaten to negatively affect revenue growth and net margins.
  
• Delays in acquiring new clients or expanding into new markets, like the U.K. and Europe with their payables products, may hinder anticipated growth rates, affecting organic revenue growth.
  
• Execution risk in strategic growth initiatives, such as expanding corporate payments into enterprise segments and new geographic areas, could limit revenue and net margin improvement if not successfully implemented.
  
• The company faces competitive risks in the cross-border payments space, where banks dominate 90% of international payment flows, potentially impacting Corpay's ability to capture a significant market share and achieve revenue targets.

Valuation

• The analysts have a consensus price target of $415.184 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 $450.0, and the most bearish reporting a price target of just $370.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.3 billion, earnings will come to $1.7 billion, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of $335.71, the analyst price target of $415.18 is 19.1% 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.