WEX was founded in Maine in 1983, it is a leading provider of niche payment processing services for commercial and government customers in the transportation, health benefits and travel industries.
The company’s fuel payment cards enable over 600,000 customers with large vehicle fleets to closely monitor and reduce their expenditure on fuel.
WEX has invested heavily in technology and it has a long track record of successfully managing complex payment networks for its customers.
Customers find WEX’s technology platform easy to use and value the data and analytics that it produces. The trust that WEX has built with its customers over the years means that a high proportion of the company’s revenues are recurring in nature.
The business’s very high profit margins have persisted over time and this is testament to its strong competitive position and the significant barriers that exist for a would-be rival to enter into this industry.
We initially met the company on a research trip in the US in 2010 when WEX was a smaller but highly cash generative business with ambitions to replicate their initial success in fuel payment cards in other verticals with similar characteristics, such as the administration and payment of employee health benefits and corporate travel expenses.
When we invested in WEX almost ten years ago, the quality of the business model was very apparent, however, at the time we believed that the stock market had underappreciated the growth opportunity ahead of the company and that the shares were undervalued as a consequence.
The management team had a strong track record and its strategy to bolt new geographies and sectors on to the company’s already established technology infrastructure seemed sensible and likely to work. We invested in the company at a 6% free cash flow yield, which we thought was attractive given the durability of the business model and the long term growth prospects on offer.
Since our initial investment, WEX’s revenues and EPS have more than tripled.
The electronic payments industry is growing at the expense of legacy manual processes and this provides a tailwind for WEX for years to come. Over the long term WEX’s mobility business should continue to grow at a mid single digit percentage rate from the addition of new customers and products.
Newer areas such as health benefits and travel offer faster organic growth as these areas are more complex and are underpenetrated. WEX also has the opportunity to acquire smaller competitors in the company’s current markets
