ELEMENT FLEET MANAGEMENT CORP.
Stock Dip On OEM Strike Is A Buying Opportunity
Our Conclusion
We believe that the UAW strike has more than adequately been priced into
the stock. Our 2024E EPS declines 2% while the stock is off 9% since
reporting strong Q2 results. We think this is a good time to be adding EFN
given revenue momentum, our expectation for solid earnings growth even
with the strike, limited credit risk at a time when that is top of mind for bank
investors, a positive capital story when banks are under pressure to build
capital, and estimated dividend growth of >50% through 2025. We reiterate
our $24 price target and Outperformer rating.
Key Points
What does the UAW strike mean for Element? If the strike broadens to
include more plants and lasts for an extended period of time, Element will
likely face a shortage of available vehicles to meet customer demand. Given
the time from production to delivery this would likely be more of a 2024 than
a 2023 impact. We use a range of what we see as plausible scenarios to
estimate potential vehicle supply disruption and EPS impact for Element; the
range implies an EPS impact ranging from less than 1% to 6%.
Updating our 2024E EPS. We are lowering our 2024E EPS from $1.42 to
$1.40 (-2%) to account for the strike. This is based on a middle-of-the-road
scenario where the strike lasts approximately six weeks and impacts a little
over half of production capacity. Note that this is more likely to be deferred
revenue than lost revenue, as customer orders, which ultimately drive
origination volumes, should not be impacted. We are simply talking about a
delay in when customer orders are filled.
Introducing 2025 estimates. With this note we are also introducing our
2025 adjusted EPS estimate of $1.60. This estimate is premised on total
revenue growth of 8% (high end of the long-term objective due to a backlog
catchup), margin expansion with expenses growing less than revenue, all
preferred shares being called in 2024, and common share repurchases
resuming in 2025. We see a high probability that dividend growth accelerates in 2025 following the redemption of preferred shares in 2025. We expect the dividend to grow >50% between now and the end of 2025.
Stock off more than the estimated EPS impact. EFN has traded down
9.3% since Q2 results were released (adjusted EPS was 3.2% higher than
consensus), when strike risk started to be priced into the OEM stocks. This
decline is more than our best case EPS impact estimate of less than 1% and
our worst case estimated impact of 6%. Magna, Linamar and Martinrea are
down -9%, -19% and -15%, respectively, over the same period.
Valuation. Element is trading at 14.1x our revised 2024E EPS and 12.3x our
2025E EPS. The average forward P/E over the last three years (since the re-
rating took hold) is 13.9x. The stock does not appear inexpensive on that
basis, but we continue to argue that a P/E around 15x is an appropriate
multiple considering business and financial characteristics.