High quality Corpay drops by about 20% to become a bargain (CPAY)

We started with Corpay (New York Stock Exchange:CPAY) In April 2022, some background The company’s stock price has only increased slightly from our recommendation, but earnings per share have jumped from $13.21 to $19.00 guidance for 2021. Growth is expected to reach 13% CAGR in 2024. This growth rate would have been higher if there had been no interest rate pressures, as management was unable to hedge interest rate risk.

We believe CPAY is very cheap at 13.6x forward earnings. 2024 guidance is for 12% EPS growth, which is in line with S&P and we continue to believe the appropriate multiple for CPAY is in the 15-20x range, given its quality and growth metrics. This is a great capital-light business with very high margins.

Here is the 10-year earnings chart we modeled.

First Quarter Results

Reported by Copey Overall, it was a roughly in-line with expectations for the quarter, with EPS of $4.10, up 8% year over year. Excluding the Russia sale, EPS growth was 14%.Earnings per share beat expectations by 1 cent.

Revenue for the quarter increased to $935 million, slightly below expectations. On a pro forma basis for Russia, organic revenue growth was 6% and overall revenue growth was 7.5%.

The bad news is that the company cut its 2024 outlook. EPS from $19.40 to $19.00 (plus or minus 20 cents). The small 2 percentage point difference is related to rising interest rates and weak foreign currencies.

The lodging business was also said to have been weaker than expected in the first quarter. The company has implemented new IT systems in this area, and management said that after a weak March quarter, it was back on track in April. This business, which accounts for 14% of total company revenue, is less important. And, despite the weakness in the March quarter, The accommodation sector increased 16% compared to the previous year. Slightly below expectations.

Still, those three items were enough to slightly lower guidance: Revenue guidance was lowered to $4.0 billion from $4.08 billion, with a $40 million hit from room rates and a $40 million hit from weaker foreign exchange rates.

Management also discussed its three-year goals during the quarter. CPAY aims to grow revenue organically by 10% annually and EPS by over 15%. As mentioned earlier, despite rate pressures, CPAY has been able to grow EPS by 13% over the past three years.

And it’s worth mentioning, despite the cut in EPS, Pro forma EPS is expected to grow 15-17% in 2024. not bad.

Of course, the stock has taken a big hit, falling 18% since April after just a 2% change in guidance.

We updated the model through 2026 with the following results (our estimates are lower than street estimates):

For EPS growth in 2025, I took a more conservative approach, with flat margins and 9% revenue growth. In 2026, I predicted EPS of around $25, with 15.6% growth for that year. Obviously this is just a prediction, but it’s interesting to note that EPS has grown nicely from 2014 to 2023.

As for achieving the company’s 10% organic revenue growth target, we note that over the past nine years, organic revenue growth has averaged 8.1%, including a tough COVID-19 year (down 8%).

Excluding that, organic revenue growth averaged 10.1% per year. Seems pretty reasonable to us, but we are concerned that gas prices will impact growth.

Corpay continues to pivot into corporate payments, acquiring Zapay and Paymerang during the quarter. The division grew revenue 17% year over year and now accounts for 26% of total revenue. The TAM in this space is huge, with CPAY now being the largest B2B issuer of MasterCard globally.

The company changed how it reports its segments, which now read as follows:

The vehicle payments division remains a concern with only 4% organic growth in the quarter. This division, which accounts for 53% of revenue, continues to add EV fleets to its customer base. The slowdown in growth today is due to CPAY’s decision to wipe out its micro customer base (40,000 customers were disconnected), which was not as profitable and experienced some accounts receivable issues. Corpay serves 80,000 customers in vehicle payments and customer retention was high and stable in the quarter.

The balance sheet remains strong (debt/EBITDA at 2.4x) and the company has an $800 million share repurchase plan in place, which represents approximately 4% of shares outstanding. There is no dividend.

In general, we value the vehicle and accommodation division at roughly 12-14x earnings, taking into account potential EV headwinds (although CPAY claims similar customer profit margins per vehicle, so is also an opportunity). Payouts should be worth 20x+, with a blended multiple of 14.1x-15.6x.

This gives us the following range: Our bull scenario is 17x, as Corpay is likely to grow at a much faster pace than the average S&P 500 stock (the S&P 500, as an index, is currently trading at 21x and growing at 12%).

But overall, holding CPAY at 14.9 times forward earnings with a 15% growth rate (PEG ratio of 1) should continue to be a win-win for investors.

This puts the price range for this stock at roughly $220 to $480, and at these levels I would consider this stock a buy.