WEX Now a Strong Sell: Is Poor Q4 Earnings Responsible?

Zacks Investment Research downgraded WEX Inc. WEX to a Zacks Rank #5 (Strong Sell) on Mar 28, 2015.

Why the Downgrade?

WEX witnessed downward estimate revisions after reporting disappointing fourth-quarter 2014 results. Over the last 60 days, the Zacks Consensus Estimate for 2015 deteriorated by 7.4% to $4.77 per share. The Zacks Consensus Estimate for 2016 also deteriorated 7% to a $5.59 over the same period.

On Feb 9, 2015, WEX reported fourth-quarter 2014 operating earnings of 90 cents per share that missed the Zacks Consensus Estimate by 12.6% and declined 20.3% year over year. The downside stemmed from foreign exchange fluctuation and low fuel prices.

Total operating expenses in the quarter increased at a higher percentage than revenues generated, thereby leading to margin contraction. The increase in expenses was attributed to higher salary and other personnel expenses, service fees, provision for credit losses, technology leasing and support, and occupancy and equipment charges. Rise in advertising, marketing, postage and shipping, communications, depreciation, amortization and impairments, operating interest expense, and other expenses also led to an increase in total expenses.

Cash position of WEX remained weak at the end of 2014 due to the seasonality of certain deposits at its banking subsidiary. Moreover, the company remained burdened with debts with a leverage ratio 3.6x the trailing 12 months EBITDA as of Dec 31, 2014, compared with 2.1x the trailing 12 months EBITDA at year-end 2013.

Also, the 2015 earnings guidance of WEX remains below the 2014 level on the assumption of losses related to the ESSO portfolio in Europe and fleet card.

Stocks to Consider

Some better-ranked stocks in the financial transaction services space include Fiserv, Inc. FISV, Ingenico S.A. INGIY and The Western Union Company WU. Each of these stocks carries a Zacks Rank #2 (Buy).

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Zacks Investment Research