New Products And AI Initiatives Will Strengthen Future Prospects In Mobility And Benefits Segments

Key Takeaways

• Strategic investments in payment processing and marketing efforts are expected to drive revenue growth and improve net margins.
  
• Expansion in corporate card capabilities and focus on EVs aim to boost market share and enhance future earnings.
  
• WEX faces growth challenges due to revised revenue projections, external macro pressures, and investments in the Corporate Payments segment that may strain margins if unsuccessful.

Catalysts

Operates a commerce platform in the United States and internationally.

• WEX is increasing investments in software assets and payment processing capabilities, particularly in the Corporate Payments segment, to accelerate revenue growth, indicating future revenue increases.
  
• The addition of sales and marketing resources, targeting areas of strategic and high growth potential, suggests upcoming improvements in net margins and revenue expansion.
  
• New product introductions in the Mobility segment and leveraging the transition to electric vehicles (EVs) are expected to enhance future revenue, creating potential for increased earnings.
  
• The use of data and AI in the Benefits segment to improve consumer engagement and decision-making should drive higher participation and funding levels, boosting future revenue and earnings.
  
• Investments in expanding corporate card capabilities and local currency transactions, along with increased sales efforts in Corporate Payments, forecast a boost in market share and transaction volume, positively impacting revenue and net margins.

WEX Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming WEX's revenue will grow by 3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.8% today to 15.0% in 3 years time.
• Analysts expect earnings to reach $438.4 million (and earnings per share of $12.28) by about March 2028, up from $309.6 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 15.3x on those 2028 earnings, down from 19.5x today. This future PE is lower than the current PE for the US Diversified Financial industry at 15.4x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.5%, as per the Simply Wall St company report.

WEX Future Earnings Per Share Growth

Risks

• The company has adjusted its long-term organic revenue growth target from 8%-12% to 5%-10% due to updated market insights and reduced growth rates, impacting future revenue projections.
  
• The Benefits segment experienced a moderation in growth, reflecting an industry-wide slowdown in the adoption of HSA-eligible plans and reliance on new product developments to stimulate growth, potentially affecting revenue growth in the near term.
  
• The Corporate Payments segment's revenue is expected to contract in 2025 due to foreign exchange rates and one-time headwinds, which could reduce earnings if these trends continue or worsen.
  
• The company has seen recent growth volatility, especially in the Corporate Payments segment, prompting additional investments to address untapped potential, which could pressure net margins if returns on these investments do not materialize as expected.
  
• External macro factors such as fluctuating fuel prices, foreign exchange rates, and a trucking recession have negatively impacted growth, potentially affecting revenue and net income if these issues persist.

Valuation

• The analysts have a consensus price target of $169.162 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 $208.11, and the most bearish reporting a price target of just $140.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.9 billion, earnings will come to $438.4 million, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 8.5%.
• Given the current share price of $155.59, the analyst price target of $169.16 is 8.0% 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.