This company makes a dollar for every 50 cents it spends
Questor is The Telegraph's stockpicking column, helping you decode the markets and offering insights on where to invest.
Some businesses and entrepreneurs have an amazing knack for creating shareholder value. Normally such companies and people are lionised by investors for their powers of 'compounding', so it's unusual to find shares in a great business selling at a very normal price. US payments company Corpay, however, could be just that.
Run by Ron Clarke, who founded the company as Fleetcor in 2000 and owns over 3pc of its equity, Corpay operates niche payment networks that connect businesses with the companies that sell to them.
Corpay offers a range of services that significantly simplify payments by automating key processes, such as invoicing, while also collecting data to control and reduce expenses, and prevent unauthorised transactions, including fraud.
Corpay can usually more than justify the small fees it charges customers on transactions through the savings it gets from the vendors in its networks.
These vendors, such as petrol stations and hotels, are happy to offer better prices to Corpay's customers in exchange for accessing the network's 'captive' spending. Both sides of the network benefit and Corpay makes money.
Building and operating niche networks creates a barrier to entry against would-be competitors because of the cost, time and complexity of replicating them. But when it needs to broaden its offering, Corpay can still use larger third-party payment networks, such as that of MasterCard.
Once customers sign up with Corpay, retention rates are high and regular transactions create large amounts of recurring revenue. Very little extra investment is required for new sign-ups, which means the business becomes more profitable as it grows.
Matt Adams, co-manager of the Orbis Global Equity fund, which counts Corpay as its second-largest holding, said: 'In financial terms, Corpay spends about 50 cents in sales and marketing to acquire a dollar of recurring revenue that sticks around for 10 to 12 years and drops through to operating income with around 60-70pc incremental margin.
'This basic formula has been remarkably consistent over the long term.'
Adams works with Orbis Global Equity's main manager Graeme Forster, who has been identified by financial publisher Citywire as one world's best equity portfolio managers, among the top-performing 3pc of over 10,000. He's one of five top managers who hold Corpay.
The strong conviction these investors have towards the stock has earned it a place among the 78 constituents of Citywire's Global Elite Companies index, which tracks the very best ideas of the world's best managers.
The fact the company has a great business model is reflected in the numbers. Corpay's gross margins are close to 80pc and operating margins are above 45pc. Even during the pandemic, when transactions slumped, operating margins stayed over 40pc.
Meanwhile, Corpay's markets are growing as more businesses adopt digital payments. Even with the Covid upset, Corpay has managed annualised earnings per share growth of 7pc over the past five years and 13pc over the past ten.
Clarke has been shrewd in how he's spent the company's cash to exploit opportunities. Many small acquisitions have helped take the company beyond its origins in managing fuel payments into corporate payments and accommodation, while also moving it into overseas markets.
The company's low investment needs mean it has been able to fund substantial buybacks as well as growth, with these repurchases shrewdly ramped up when the share price collapsed through 2021 and 2022 due to a sell-off in the wider payments sector and pandemic-related fears.
Worries at the time of the sell-off also concerned how the company's fuel payments business would adapt to the transition to electric vehicles (EVs). So far, it has done well by simply taking a fuel-agnostic approach, which includes establishing a network of over 600,000 EV charging points. What's more, the company's faster-growing corporate payments business is becoming ever more important.
Adams said: 'We see potential for revenue growth to accelerate above 10pc over the next three to five years. For example, we believe corporate payments has a durable growth rate of 15 to 20pc, and will soon represent more than 35pc of revenue, compared to about 20pc of revenue in 2019.'
A more immediate worry is whether the US economy could slip into recession, which would weigh on corporate transactions. The jury is out, but with the shares trading at 16 times forecast next year earnings having fallen 11pc during the recent market rout, a lot is already in the price. In the longer term, smart money is betting Corpay's success will continue.
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