Is it time to swipe the stocks of fuel-card companies?

Fuel-card companies offer an appealing mix of steady earnings and high growth potential, says Fidelity's Ruth Nagle.

• In her search for companies that use innovative technology to improve and automate financial services and products, Fidelity Portfolio Manager Ruth Nagle is finding compelling opportunities in businesses that provide fuel cards for clients with a trucking fleet.
• "Fuel-card providers have achieved consistent growth and have the potential for even higher advancement in the next few years," says Nagle, who manages Fidelity^® Select FinTech Portfolio.
• She explains that fuel-card providers serve trucking fleets, which might be as small as four vans belonging to a plumbing company or as large as hundreds of thousands of commercial vehicles owned by, say, FedEx or UPS.
• In helming the narrowly focused, concentrated portfolio, Nagle favors companies with an improving return or that have a high return that the market mistakenly doesn't appear to believe can persist. She also prioritizes "quality compounders," or companies she believes have the potential to grow earnings for years to come.
• Fuel cards enable employee drivers to purchase gas and other needed items at service stations, according to Nagle. Then, at month's end, their bill goes directly to their employer, itemized to indicate not only which driver made which purchases, but also providing other metrics that offer insightful information to the employer.
• "Fuel cards thus provide various benefits to both drivers and companies," says Nagle. "Drivers, for example, gain a convenient way to track expenses, while employers might gain valuable insight to control costs, as well as detailed reporting to help them make superior business decisions."
• Nagle explains that fuel-card providers earn revenue by charging a fee for each transaction, as well as a monthly fee to customers. As of December 31, the fund counts two of the dominant players here, WEX and Corpay, among its holdings. Both are outsized positions relative to the fintech industry benchmark.
• "I particularly like WEX and Corpay for their high market share, strong profit margins, track record of healthy earnings growth, and reliable revenue and earnings streams, all at an attractive valuation," she says.
• Nagle acknowledges one notable challenge facing fuel-card businesses — volatility in the price of fuel leading to volatile revenue. Because each company receives a transaction fee as a percentage of the transaction amount, they earn more when fuel prices are higher, and vice versa.
• But she notes that WEX and Corpay have adopted a similar strategy for addressing this challenge by diversifying their businesses into digital payments, an increasingly high-growth opportunity to go along with their steadier fuel-card offerings.
• "Together with their core, high-margin fuel-card business, this digitization play has provided WEX and Corpay with valuable earnings diversification and the potential for improved growth," Nagle concludes.