Unattractive – Read before buying Element Fleet Management…

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

Element Fleet’s fleet comprises of 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.

Investment Data

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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. Moreover, its business has high entry barriers for newcomers.

Element sold off its 19th Capital business and is focusing on its core operations of providing services and financing solutions. Its fleets 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. It won new business including self-managed fleets and also renewed existing clients in the second quarter. The service fleet vehicles were more active than sales fleet vehicles during the quarter. Element Fleet claims to achieve a reliable annual net revenue growth of 4-6% in normal market conditions.

Dividends

Element Fleet has an annual yield of 3% but a high payout ratio of 163%. It made a 40% cut in its last dividend payment but has a dividend growth CAGR of 21% in the last three years. Element’s EPS has also registered a degrowth of 50% 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. Its balance sheet is strong as leverage continues to decline and the company is targeting a sub-6 tangible leverage ratio by the end of 2020. Its current lease book of assets leased to high-quality counterparties is fully funded.

Given the company’s huge scale it is able to reduce the total cost of fleet ownership and operation for its clients. Moreover, its client-centric transformation program has improved its operating leverage and increased free cash flow. 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 resulted in $20 million in annual run-rate profit improvements in Q2 2020, and $166 million cumulatively, to date. Element is on track to achieve its $180 million target by year-end. It is expecting to complete the transformation by the end of 2020. The company has an adjacent market size of $2 billion, comprising mostly of the self-managed fleet, that it can potentially serve. Element Fleet is further targeting another enhanced growth strategy in the second half of 2020.

Competition

The industry is characterized by rational competition but high barriers to entry. Element Fleet competes with the likes of Automotive Rentals, BBL, Enterprise Fleet Management, Wheels, Holman Automotive, Donlen Corporation, etc.

Bottom Line

Element Feet provides essential services to business owners. The company is expecting improved earnings as a result of its ongoing transformation program. Significant advantages of scale, expertise and financial strength form a deep moat around Element Fleet’s business. The COVID-19 pandemic crisis further makes a compelling value proposition to clients. However, lower earnings and a high payout ratio could be reasons for investor concern.