As the pandemic took hold in early 2020, the stock market crashed and shares of niche payments company WEX (WEX -7.32%) fell more than 60%. Much of the market has rallied furiously since then, but WEX stock still hasn't fully recovered. As of this writing, it's still down about 10% from the all-time highs it reached just before the crash.
It may be time to give WEX stock another look. Here are three good reasons to buy now.
Image source: Getty Images.
1. Its business should rebound
WEX has three main segments. The coronavirus reduced revenue for two of them last year. For 2020, its fleet-segment revenue (think fuel cards) fell 12% year over year, its travel segment fell 24%, and its health segment rose 15%. The company aspires to have segment revenue evenly split in time, but its fleet segment is still the biggest part of its business for now.
| Segment | Percent of Total Revenue, 2018 | Percent of Total Revenue, 2019 | Percent of Total Revenue, 2020 |
|---|---|---|---|
| Fleet | 65% | 60% | 59% |
| Travel and corporate | 20% | 21% | 18% |
| Health and employee benefits | 14% | 18% | 23% |
Data source: WEX.
Here are a couple of reasons I believe its fleet and travel businesses are poised to rebound from disappointing 2020 results.
For WEX's fleet business, consider rising fuel costs. The company actually benefits from higher gas prices because it results in higher spending per fill-up from its customers. According to the U.S. Energy Information Administration (EIA), the national average for gas was almost $2.26 per gallon in 2020, down 16% from 2019. This drop in price lowered WEX's revenue by about $20 million in the fourth quarter alone. Now, the EIA is predicting prices of $2.61 and $2.54 per gallon in 2021 and 2022, respectively. So WEX's fuel-price headwind is abating.
Moreover, its fleet-solutions business otherwise held up well in 2020, all things considered. For example, transactions from truckers rose 14% year over year in the fourth quarter. Therefore, there's still demand for fleet solutions, but some activity slowed because of the pandemic. Now that coronavirus vaccines are being distributed and life is starting to normalize, expect fleet activity to rise. And increased activity plus higher fuel prices can carry WEX's fleet-segment revenue higher in 2021 and beyond.
Its travel business probably won't recover as quickly. According to research by the Global Business Travel Association (GBTA), business travel won't recover to pre-pandemic levels until 2025. But the group predicts 21% year-over-year growth in 2021, to WEX's benefit.
That said, consumer travel is expected to rebound faster than corporate and WEX acquired eNett and Optal, which focus more on consumer travel, in December. It may take some time for WEX to integrate these businesses in a way that boosts operating leverage, but for now, the acquisition could lead to improving revenue for its travel segment.
Image source: Getty Images.
2. It has competitive advantages
There's a reason companies choose to process transactions on WEX's networks instead of normal payment networks. The company does more than facilitate the transaction; it also collects data that businesses can use. With corporate fuel cards, for instance, employees enter odometer readings at fill-up, so managers can keep tabs on that. Not many payment networks offer this necessary service, creating a kind of competitive advantage.
Furthermore, WEX has signed deals that show its strength. In December, LUKOIL North America signed a multiyear agreement with WEX, continuing their 34-year business relationship. In March, WEX reached a deal with OMV Aktiengesellschaft to expand its presence in Europe. So despite a challenging year, the company continued to win multiyear deals like these, boosting future growth and (to some degree) insulating it from competition.
3. It's a tech value stock
Many technology stocks show an undeniable trend: Valuations are creeping higher and higher. Consider the price-to-sales ratios for companies like PayPal Holdings, Square, and Mastercard over the last three years. These business aren't directly comparable to WEX, but their soaring valuations confirm the rising-valuation trend. By contrast, WEX's valuation has held relatively steady, as the chart below illustrates.
Three-year P/S valuation expansion. WEX PS Ratio data by YCharts.
PayPal and Square had historically good years in 2020 and yet their valuations still soared. In other words, results are good, but the stock price is going up even faster than business gains, and this creates some valuation risk. By contrast, WEX had a difficult 2020 but should rebound and return to growth in the near future. However, despite the clear near-term tailwinds, its valuation is in line with its historical norms. This makes WEX a sneaky value stock for me.
A stock worth buying
With its niche offering and multiyear deals, WEX isn't going anywhere. In fact, its business is poised to rebound and grow from here. For this, investors today can snag shares at a normal valuation as opposed to stocks trading at extreme multiples. For me, these are three great reasons to buy WEX stock today.
