。2 North America Equity Research 29 January 2019 Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin.huang@jpmorganWEX: FY19 Street EPSstill appearshigh. We expect WEX’s 4Q results will bein line with expectations, but we’re cautious going intoits FY19 guidance. WhileM&A and portfolio wins should help offset the anticipated fuel drag, Street EPSestimates for FY19 still appear too high (JPMe/Street $8.80/$9.09, implying7%/10% yoy growth), considering WEX’s profit exposure to fuel prices.Management highlighted that Chevron and Shell will take time to ramp (we don’tmodel full contribution until 2H19), while Noventis is expected to be moderatelyaccretive. With that in mind, we believe fuel drag offsets are somewhat limited,acknowledging that pricing is likely a more available leverduring periods ofdeclining oil prices. Chevron & ShellRehash. In 2016 and 2018, respectively,WEX won the Chevron(from FLT) and Shell (largely from Citi) fuel card portfolios, and should beginrecognizing revenuesfrom bothin 2019. FLT said on its 3Q18 earnings call that itexpects a $35M revenue drag as a result of the lost Chevron account(to WEX’sbenefit), and we believe Shell is slightly larger (JPMe run rate $40M). We model a1H ramp in migration, and expecta ~$60M combined contribution for WEX inFY19.Even excluding the help/drag from theseportfolios, we model FY19 organicgrowth of 9% for WEX, ahead of our 8% assumption for FLT. Including theimpact from the portfolios, we model 13%growth at WEX, vs. 7% at FLT. Updating WEX estimates. We are updating our WEX estimates to includeNoventis (closed January 24th), while reducing our 1Q19 fuel estimate slightlyaspreliminary EIA data shows January retail prices at $2.52, slightly below our prior$2.58estimate (updated in December). Our FY19 Rev/EPS estimates go to$1.63B/$8.80from $1.62B/$8.73, while FY20 goes to $1.80B/$10.19 from$1.77B/$10.16. Valuation update.FLT and WEX shares are down 1% and 10% since Oct 31st (after both reported 3Q earnings), versus a 3% decline in the S&P500.FLT and WEX trade 17.0x and 17.9x our FY19 estimates, respectively, versus three yearNTM averages of 18.7x and 19.7x. Givenits relative valuation discountandsmaller exposure to fuel, we continue to prefer FLT(supported by faster FY19 EPSgrowth of11%, 360bps ahead of WEX before considering capital deployment) acknowledgingthat M&A and execution will be key in 2019, and that organictopline growth will favor WEX. 3 North America Equity Research 29 January 2019 Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin.huang@jpmorganMacro Trends Fuel Price Exposure Table 1, below, summarizes and compares fuel price exposure for FLT and WEX.We note that FLTis less exposed to fuel prices, and is over indexed to diesel pricescompared to WEX, which have held up better than unleadedYTD.Table 1: FLT & WEX Fuel Exposure Summary FLTWEX% of fuel-exposed revs (non-spread)14%20% % of spread-exposed revs6%Mid-single digit* Approx. Fuel Mix2/3 diesel; 1/3 unleaded60% unleaded; 40% diesel EPS impact from $0.10 fuel change(annual)+/-$0.09*+/-$0.18 EPS impact from 5% fuel change(annual)+/-$0.13*+/-$0.24* Source: Company reports and J.P. Morgan estimates and calculations Note: * reflects J.P. Morgan estimates; EPS impact assumes 95% profit flow thru of revenue impact and utilizes JPMe tax ratesandFY19 share count Fuel Revenue Exposure: WEXat 20%, FLT at 14% A portion of FLT and WEX’s revenue are tied to retail prices of fuel, as theyearn adiscount rate on card spendingat the pump. At its 2018 analyst day, WEXhighlighted that 20% of its revenues are tied to fuel prices (down from 70% at itsIPO). This compares to ~14% of FLT’s revenue which is directly impacted by retailfuel prices (disclosed quarterly). We believe WEX’s fuel exposure is weighted 60% unleaded, 40% diesel, whileFLT’s total exposure is closer to 2/3 diesel, 1/3 unleaded. This mix should be arelative positive forFLT into 2019 as retail diesel prices (down 12% from Oct peak)have held inbetter than unleaded (down 23%).Fuel Spreads May Help 4Q ResultsDuring periods of declining oil prices, fuel retailers typically delay passing on lowercosts to customers, and wholesale-to-retail spreads typically expand. This effect isknown as the “rocket and feather effect,” as retail prices are quick to rise when oilprices increase, but are often slow to fall during periods of declining oil prices. EIAand Bloomberg data indicatethis phenomenonoccurred during 4Q18, shown in thefigure below.4 North America Equity Research 29 January 2019 Tien-tsin Huang, CFA (1-212) 622-6632 tien-tsin.huang@jpmorganFigure 1: Average U.S.Wholesale-Retail Fuel Spreads Source:EIA, Bloomberg and J.P. Morgan FLT and WEX earn a share of this whole-retail spread on a portion of their fleetbusiness. Approximately6% of FLT’s total revenue is tied to spreads(disclosedquarterly), while WEX’s spread exposure is isolated to Europe (within its Essobusiness). At the time of the Esso deal, the majority of its revenue wasdriven bywholesale-retail spreads, and we believe the portfolio accounts for 5-10% of WEX'srevenue today. We expectFLT and WEX’s spread-based revenue will help lift 4Q results, but willlikely normalize by 1Q19 as it typically takes weeks (rather than months) for retailprices to match wholesale price declines. Earnings Impact: Near 100% Flow-Thru At its 2018 investorday, WEX confirmed that a $0.10 change in fuel prices stilldrives a $0.18 impact on annualizedEPS. Based upon prior disclosure(in FY17 this$0.18 was associated with a $12M impact on revenue), this impact implies anessentially 100% profit flow-thruoffuel revenues. Structurally, FLT’s earningsimpact from fuel volatility should be no different.Said another way, moves in fuel-sensitive revenues have essentially no expenseoffset at FLT or WEX (although the companies arguably have pricing offsets duringperiods of declining fuel prices).Considering this, we estimate that a $0.10 change in fuel prices drives an annualized$0.09 change in FLT EPS (1% of our FY18 EPS estimate), compared to WEX at$0.18 (or 2% of our FY18 estimate). Our FY19 EPS estimate for FLT implies a$0.23 (2%) headwind from fuel prices, vs. $0.68(8%) for WEX, reflecting fuel- neutral EPS growth of 13% and 16%, respectively. Unleaded Fuel and Diesel Prices Down Through mid-January, retail unleaded and diesel prices have fallen 23% and 12%from their early October peak, shown by the figure below. Average unleaded fueland diesel prices during 4Q, however, were up y/y.Unleaded gaspricesdecreased$0.50 $0.60 $0.70 $0.80 $0.90 $1.00 $1.10 $1.20 $1.30 。。。。。。