Innovative EV Solutions And AI Drive Optimistic Growth Despite Market Challenges

Key Takeaways

• Expansion into new markets and the development of apps like 10-4 BY WEX and PACER aim to meet unmet needs and enter new customer segments.
  
• Strategic focus on the EV sector and a significant cost-saving strategy highlight efforts to increase revenue streams and improve net margins through efficiency and market adaptation.
  
• Dependency on volatile factors like fuel prices, foreign exchange rates, and travel market trends introduces significant risks to revenue and earnings stability.

Catalysts

Operates a commerce platform in the United States and internationally.

• Expansion into new market adjacencies and development of innovative solutions such as the 10-4 BY WEX mobile app for truckers and PACER for field service management are positioned to drive revenue growth by addressing unmet customer needs and tapping into new customer segments.
  
• Strategic focus on the electric vehicle (EV) sector, including public charging solutions and a pipeline of over 50,000 potential EV vehicles, is likely to enhance revenue streams as the demand for EV solutions grows among government and large enterprise customers.
  
• Execution of a $100 million annual cost-saving strategy, exceeding its full-year goal in the first half, with significant savings being reinvested to fuel long-term growth in areas like commercial teams and technical infrastructure, which could improve net margins.
  
• Strong emphasis on digital transformation and artificial intelligence to increase operational efficiency and enhance customer value, potentially leading to improved net margins through better credit adjudication and risk management.
  
• Active share repurchase programs, including an expected additional $300 million in common stock repurchases, signal confidence in the company's intrinsic value and growth potential, aimed at EPS growth through the reduction of outstanding shares.

Assumptions

• Analysts are assuming WEX's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.3% today to 21.5% in 3 years time.
• Analysts expect earnings to reach $682.3 million (and earnings per share of $13.88) by about October 2027, up from $246.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.2x on those 2027 earnings, down from 35.7x today. This future PE is greater than the current PE for the US Diversified Financial industry at 15.7x.
• Analysts expect the number of shares outstanding to grow by 6.15% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Risks

• The reduction in outlook for the remainder of the year due to volume trends primarily in the travel business could impact future revenue projections.
  
• Fluctuations in fuel prices and foreign exchange rates could cause variability in adjusted earnings per share (EPS), affecting net margins.
  
• The dependency on continuous revenue growth from the mobility segment projects a reliance on external factors such as fuel prices and customer sentiment within the freight market, which could impact revenue stability.
  
• A potential slowdown in the corporate payments segment, particularly related to travel customer purchase volumes, and the transition of Booking.com volume to a new model might lead to lower than anticipated revenue and earnings.
  
• The company's strategic focus on expanding through adjacencies and new product innovations, such as EV solutions, entails execution risk that could affect the ability to meet long-term growth objectives if these initiatives do not perform as expected or generate the anticipated returns.

Valuation

• The analysts have a consensus price target of $226.0 for WEX 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 $285.0, and the most bearish reporting a price target of just $190.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.2 billion, earnings will come to $682.3 million, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 7.5%.
• Given the current share price of $213.76, the analyst's price target of $226.0 is 5.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.