WEX Inc. (“WEX”)

WEX Inc. offers a compelling investment from current levels. WEX is a payments company with three segments: fleet fuel cards, health savings accounts, and corporate payments. WEX’s business model is attractive because it is capital-light. Almost all net income generated by the company is available as free cash flow to pay down debt, make acquisitions, or return to shareholders. Although growth has slowed in recent years, the valuation doesn't reflect the high-quality nature of the business. Our investment thesis is below:

Our investment thesis is below:

1. High-Quality Business - WEX Inc. operates a high-quality business model that has low capital intensity and strong customer retention. Payment processing requires limited physical infrastructure. Also, WEX has low customer turnover due to the embedded nature of its services in clients’ daily operations, such as fleet fuel management and employee benefits administration. These offerings often involve customized integrations and data reporting tools that create high switching costs and lead to long-term client relationships. This enables WEX to generate robust free cash flow and high returns on invested capital.

2. Low Valuation on Price to Earnings and EV/EBITDA Basis - WEX appears to be a compelling investment due to its low valuation. Based on our estimates, the stock trades at just 9.7x 2026 expected earnings per share and 8.7x Enterprise Value to EBITDA. These absolute levels are attractive, especially given WEX's consistent revenue, strong free cash flow, and capital-light operating model. Stock market investors appear to be overly focused on short-term volatility in fuel prices and macroeconomic uncertainty and not giving enough credit to the durability of WEX’s core business and the company’s intention to deleverage and return capital to shareholders. As these concerns fade, there is meaningful potential for multiple expansion.

3. Higher than Normal Debt Level creates a private equity-like investment in the public markets -
WEX is particularly attractive because its capital structure creates a risk/return profile similar to a
private equity investment. However, it remains investible in the public markets. Following the March
2025 tender offer, the company carries a high level of debt, which is a reason why WEX trades at a
discounted valuation. However, we believe investors are being overly punitive in their assessment of this leverage. As WEX continues to deleverage, the market will begin to re-rate the stock.

4. Presence of Activist – Impactive Capital owns 7% of WEX and has filed a 13D. The firm wants WEX to sell-off some units and streamline operations. They have also made noise about running a proxy fight to get some representation on the WEX Board of Directors. The presence of an activist investor in WEX shares adds a layer of accountability to management. It serves as a check against valuedestructive decisions. We believe Impactive’s involvement signals to the board and executive team that shareholders are closely watching and will not tolerate actions that dilute value or ignore shareholder interests. In our view, the recent tender offer and WEX’s public commitment to avoid pursuing acquisitions while the stock trades at depressed valuation levels are both indirect results of the activist’s presence. Impactive’s influence likely reinforces a disciplined capital allocation strategy, aligning management more closely with shareholder priorities and enhancing the investment case.

5. Strong Capital Allocation – WEX management has recently made a couple of shareholder-friendly capital allocation decisions. In March 2025, the company completed a tender offer to repurchase 10% of its shares. This transaction improved earnings per share in a tax-friendly manner and reflects management and the Board’s confidence in the intrinsic value of the business. Additionally, management has publicly committed to refraining from acquisitions while the stock trades at current levels. This signals that management is focused on maximizing shareholder value. 

There are risks to our investment thesis on WEX:

1. Economically Sensitive - A risk to our WEX investment thesis is the company’s exposure to economic cycles in its fleet fuel card segment. WEX’s revenues are partly tied to gas prices and fuel volumes, which both usually decline during periods of economic softness. WEX also extends credit to small businesses for their fuel purchases. WEX’s credit losses have risen in past recessions. While the company benefits from a recurring revenue base and long-term client relationships, its economic sensitivity could lead to some earnings volatility. We think other investors are too focused on this risk. As we have a longer-term investment horizon than other investors, we tend to view earnings volatility and credit risk across a full economic cycle. 

2. Investor Disinterest in Sector - The second risk to the WEX investment thesis is a lack of interest in small and mid-cap payments processors. Some investors view WEX as a value trap since the stock price has been flat over the past 7 years. However, we believe this view overlooks the substantial improvement in WEX’s valuation. The Company’s P/E ratio has compressed from 22x in 2018 to 9x
our 2026 earnings per share estimates despite steady earnings growth, recent share repurchases,
and the activist presence. While investor skepticism remains a hurdle, we see it as an opportunity.

3. Unexpected Acquisition – A third risk to our WEX investment thesis is the possibility that
management reverses its public stance and pursues an acquisition. If WEX were to announce a deal,
it would undermine the deleveraging narrative that is central to our investment case and likely
prolong the company's elevated leverage profile. More importantly, such a move would raise
serious questions about management's confidence in the intrinsic value and growth potential of
their core business. An acquisition would damage investor trust and weaken the argument for
multiple expansion, potentially keeping the stock trapped in a low-valuation range.

In summary, we believe WEX presents a compelling investment case with an attractive business model, compelling valuation, and a clear commitment to paying down debt. We also caution readers that we purchased shares of WEX in May 2025 at a price below $140. Since then, WEX's share price has reached $170 due to the general market rally and the company's strong 2nd quarter earnings report in late July. WEX remains a compelling long-term investment, but the stock has moved in the short term and could retrace recent gains.

Disclaimer: The discussion of any security is meant solely as an illustration of our investment and thought process and should NOT be considered as a recommendation or suggestion to buy or sell any securities. Before you make any investment, do your own research and talk to your own financial adviser. Information in this report is received from external sources. Therefore, we can make no guarantee as to the completeness or accuracy of the information provided.

Not all research is for securities currently held. Any securities for which research is provided herein may be reduced, completely closed out, or not purchased at all without notice of any kind.