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WEX Inc. Solid Quarter, Multiplying Growth Drivers, Reiterate Outperform

WEX reported third-quarter adjusted EPS of $1.18, adjusted for $0.10 of one-time items, which compares with our estimate and consensus of $1.12. The one-time items included $0.04 from deal integration costs and $0.06 from the impact of an Australian retroactive tax law change. The upside to our estimate was driven primarily by higher account servicing revenue and finance fee revenue. Total fleet transactions were in line with our estimate, up 1% year-over-year, with higher-than-expected payment processing transactions offsetting lower-than-expected transaction processing transactions.

New client wins were mostly offset by slightly negative same-store sales, which were down 1.4%. The number of vehicles serviced increased by 6% (0.2 million) to 6.9 million during the quarter; however, fleet utilization was down. The other payments solutions (OPS) segment volume growth of 32% was below our 39% estimate. Management reiterated guidance of 30%-40% purchase volume growth in 2012. We forecast 31% growth of OPS volume growth in 2012. We believe upside to our volume growth estimate could stem from PaySpan, which is live and has a solid pipeline, according to management. The company took a $16.2 million ($0.27 per share after tax) goodwill impairment to its Australian prepaid business, which generates about 1% of revenues.

Management provided fourth-quarter revenue guidance of $162 million-$169 million, which bracketed our estimate but was above consensus. Fourth-quarter adjusted EPS guidance of $1.01-$1.08 includes $0.07 of one-time deal integration costs for Fleet One. The consensus estimate was at the low end of the range adjusting for the deal integration costs. Our 2012 adjusted EPS forecast of $4.06 includes $0.17 of one-time items (i.e., deal integration and tax catch-up) in the third and fourth quarters. Adjusting for the one-time items, our 2012 EPS estimate is up $0.02 from our prior estimate of $4.21.

Our adjusted EPS estimates remain $4.91 for 2013 and $5.41 in 2014. Our estimates include accretion from the Fleet One acquisition, which closed in early October, and modest benefit from PaySpan volume and the acquisition of the majority stake in UNIK, a Brazilian commercial payments company. We forecast $0.28 of GAAP EPS accretion in 2013 from Fleet One, excluding integration costs. Fleet One is increasing transactions at a rate in the double digits, which management expects to continue. We expect UNIK, which was acquired on August 30, to be accretive by a few cents to our 2013 estimate. Management expects PaySpan to add at least $1 billion of volume in 2013. We believe it has the potential to add as much as $8 billion in payments volume or more in a few years, though risks remain high as this is totally unproven at this point.

We reiterate our Outperform rating. In our opinion, the company is performing well in a slow growth economy. The company has numerous growth initiatives around the globe and plans to continue to invest in 2013. Despite the Fleet One and UNIK cquisitions, WEX is still under-levered, in our view. WEX shares trade at 15.0 times our 2013 adjusted EPS estimate, which equates to a 18% premium to the S&P 500 versus about 20% premium before the economic downturn.

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