Corporate Payments Headwinds And EV Trends Will Define Future Paths

Key Takeaways

• WEX's reduced revenue growth target and weaker Corporate Payments performance signal challenges in achieving historical growth rates.
  
• Investments may not yield immediate returns, impacting margins, amid macroeconomic pressures like fuel prices and foreign exchange.
  
• Strategic investments and infrastructure scalability position WEX for future revenue growth, enhanced margins, and value creation through EV trends and market opportunities.

Catalysts

Operates a commerce platform in the United States and internationally.

• WEX has adjusted its long-term organic revenue growth target from 8% to 12% to a more modest 5% to 10% range, reflecting softer market conditions in key segments like travel and benefits, indicating potential slower revenue growth.
  
• Growth in the Corporate Payments segment is expected to remain below historical trends through 2025, partly due to volatility and large contract renegotiations, suggesting potential pressure on segment earnings growth.
  
• The benefits of investments in new product development and sales may not materialize immediately, potentially increasing short-term expenses and impacting net margins while revenue growth may stay subdued.
  
• The reduction in same-store sales growth in the Mobility segment, exacerbated by macro factors like fuel prices and the trucking recession, may hinder revenue growth and net margins.
  
• WEX anticipates a decline in Corporate Payments revenue in 2025, attributed to foreign exchange rates and one-time headwinds, which could negatively affect overall revenue and earnings trajectory.

WEX Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on WEX compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming WEX's revenue will grow by 2.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.8% today to 15.4% in 3 years time.
• The bearish analysts expect earnings to reach $438.4 million (and earnings per share of $12.28) by about April 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 price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, down from 14.2x today. This future PE is lower than the current PE for the US Diversified Financial industry at 14.0x.
• 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 8.91%, as per the Simply Wall St company report.

WEX Future Earnings Per Share Growth

Risks

• WEX's investments in product development and sales resources have payback periods of two years or fewer with strong lifetime value to customer acquisition cost ratios, indicating potential for future revenue growth and enhanced earnings.
  
• With a consolidated infrastructure for corporate payments, WEX can efficiently scale both embedded payments and retail through high-margin products, potentially increasing net margins over time.
  
• The transition to electronic vehicles (EVs) presents opportunities for WEX to improve its unit economics within its customer base, which could positively impact revenue and profitability as the migration to EVs continues.
  
• WEX's strong cash generation, solid balance sheet, and low leverage provide financial flexibility to optimize its capital structure and invest in growth initiatives, which could sustain net margins and benefit shareholder value creation.
  
• Positive trends in WEX’s direct AP purchase volume and a strategic focus on capturing the substantial market opportunity in AP solutions can drive higher revenue and, despite temporary declines, lead to an overall increase in future earnings.

Valuation

• The assumed bearish price target for WEX is $141.24, which represents one standard deviation below the consensus price target of $160.76. This valuation is based on what can be assumed as the expectations of WEX's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $200.0, and the most bearish reporting a price target of just $130.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $2.8 billion, earnings will come to $438.4 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 8.9%.
  
• Given the current share price of $129.91, the bearish analyst price target of $141.24 is 8.0% higher. The relatively low difference between the current share price and the analyst bearish 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.