Element Fleet is Unattractive – Read before buying

Element Fleet is a leading fleet management company. It is the largest company managing a pure-play commercial fleet in the world. Element is a global B2B and B2G services company. The company has assets worth $17 billion and more than 3 million fleet vehicles under management in over 50 countries around the world.

The company’s fleet comprises cars and light-duty vehicles, commercial trucks and material handling equipment, etc. It provides services and financing solutions for commercial vehicle fleets.

Element Fleet has three complementary revenue streams – Net Financing Revenue, which represents ~40% of net revenue, Services (~50%), and syndication (~10%). Element Fleet enjoys leading market share in North America, Australia, and New Zealand.

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Revenue Growth & Market Exposure

As a leading comprehensive fleet management solutions company, Element Fleet provides an end-to-end suite of fleet management services to its customers. The company caters to some of the leading companies like American Greetings, BASF, Owners Corning, Sanofi, etc. It has over 5,500 corporate and government clients. Approximately two-thirds of its customer base comprises investment-grade clients with strong counterparty credits.

Moreover, Element has a high client retention ratio (~98%) and its leases contain cross-default provisions (which allows it to put non-paying clients into default with their other creditors), and no force majeure clauses. The company enjoys long-term, sticky client relationships and is known for its quality of the fleet, impeccable customer service, customized products, and competitive pricing. Clients prefer Element Fleet for its efforts towards reducing their total cost of vehicle ownership and operation.

Element’s servicing income that accounts for ~80% of its leases is derived from client subscriptions for services, which make predictable contributions to revenue independent of client vehicle activity. The company offers a suite of fleet management solutions spanning the whole fleet lifecycle, from acquisition and vehicle financing to program management and remarketing of fleet vehicles. Element Fleet is well diversified across clients, industries, geographies, revenue, and funding sources. The company currently serves a market worth $4 billion. 

Element’s fleet of delivery vans, utility service trucks, and vehicles transporting samples for lab testing, etc. benefited in the pandemic while fleet utilization declined for some of the clients given WFH requirements. The company completed over 100 commercial deals and launched a growth strategy for Custom Fleet in the last year that posted a 35% YoY net revenue growth in the latest quarter. Element Fleet claims to achieve a reliable 4%-6% growth in annual net revenues under normal market conditions.

Dividends

Element Fleet has a sound track record of returning ample free cash flow to its shareholders by way of share buybacks and dividends. It returned $104.5 million to shareholders in the last quarter.

The company has a modest annual yield of 1.9% but a reasonable payout ratio of 44%. It last raised its dividends by 40% in 2020 and has a dividend growth CAGR of 46% in the last five years. Element’s EPS has also grown at 50% CAGR in the last three years. The company has a resilient business model with more than 80% of its fleet assets operating as work vehicles for its clients and nearly two-thirds of its net earning assets being leased to investment-grade rated clients, reducing the risk of default.

Moreover, Element’s clients are distributed in over 700 industry segments, with low exposure to hospitality and travel and leisure sectors, across five countries. Its balance sheet is strong as the company continues to reduce its liabilities ($4.3 billion in the last three years). Element is in a good position to leverage its scale and capital-light business model to reduce its overall cost and lead the EV transition.

Element’s client-centric transformation program has improved its operating leverage and increased free cash flow. Element has an industry-leading scalable operating platform with minimal capex requirements. The company is focusing on solidifying its core operating platform and client relationships, strengthening its balance sheet, and divesting all non-core assets through this plan.

This transformation program resulted in $208 million of run-rate profit improvements and delivered $133 million of operating income enhancement in 2020. The company has an adjacent market size of $2 billion, comprising mostly of the self-managed fleet, which represents a very large opportunity for sustained organic net revenue growth. It has significant opportunities to grow with 55%-65% of its addressable markets being currently unpenetrated.

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Competition

Element Fleet competes with the likes of Automotive Rentals, BBL, Enterprise Fleet Management, Wheels, Holman Automotive, Donlen Corporation, etc. The industry is characterized by rational competition and high entry barriers. Element Fleet is the market leader in North America and Australia / New Zealand. The company continues to invest in innovative tracking tools and fleet management technologies making the whole process more productive for its clients.

Bottom Line

Element Feet provides essential services to business owners. The company’s diversified fleet might reduce some hiccups arising from corporate clients opting to work from home. It is expecting improved earnings as a result of its ongoing efforts towards transformation of its operating platform, strengthening of its balance sheet, and divestment of non-core assets. Significant advantages of scale, resilient recurring revenues, expertise, and financial strength form a deep moat around Element Fleet’s business. 

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DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.