BEST SMIDCAP IDEAS: SOLID OUTLOOK AND SELF-MANAGED FLEET OPPORTUNITY ATTRACTIVE
THE TD COWEN INSIGHT
Element looks well-positioned, in our view, for earnings growth to persist, driven by solid automobile fleet originations and servicing revenue growth. Management is confident in meeting, or exceeding, 2024 guidance. The self-managed fleet market appears to be a deep, multi-year opportunity.
Summary Of Our Thesis
Element looks well-positioned, in our view, for earnings growth to persist, driven by an orders backlog which supports a solid originations outlook, and servicing revenue growth momentum. The self-managed fleet market appears to be a deep, multi-year opportunity. The company is also developing a strong track record of delivering against guidance.
What Is Underappreciated Or Misunderstood?
Despite Element's strong growth momentum since 2021 (low double-digit revenue growth in 2022 / 2023, and EPS / FCF per share growth > 20% in 2022 / 2023), we see a solid runway for growth to persist. In particular, we believe the opportunity is attractive for further conversion of self-managed fleets (those companies who are not using a fleet management company). Element is showing traction in this priority area, with the addition of 70 new clients in 2023 (self-managed conversions), and 23 in Q1/24 (a 32% increase annualized vs. 2023). The market opportunity appears deep in our view. Management estimates they have a 13.5% share of the U.S. / Canada auto fleet management market, with 55% of the market remaining self-managed fleets (implying a US$2.5 billion annual revenue opportunity). Similarly, Element has 4% / 6% market share in Mexico / Australia- New Zealand (ANZ), with the self-managed fleets portion representing 60% and 65%, respectively (implying a combined annual revenue opportunity of ~$3.3bln). To put this into context, Element generated US$1.0bln in revenue overall in 2023. Any traction here at the margin in converting self-managed fleets could be significant for Element