The following segment was excerpted from this fund letter.
Verra Mobility (NASDAQ:VRRM)
Verra Mobility is a leader in transportation technology and operates in three segments: commercial, government and parking. The commercial and government segments represent 85%+ of revenues. Verra is an attractive business with mid-to-high single digit revenue growth and sustainable competitive advantages.
Commercial services provide tolling services and violation management for commercial fleets (i.e., rental cars). Verra is integrated with tolling authorities and has a revenue split with rental car operators. The business should benefit from two key tailwinds including the continued shift from cash to cashless tolls and conversion of highways to toll roads. Currently ~65% of toll booths are cashless and that is expected to grow to over 80% over the next few years.
Verra is highly integrated into the rental car system with long-term contracts and technology that would be expensive to replicate. The market consensus is Verra’s rental car business has recession risk as it is tied to travel demand. In addition, there is commentary that ridesharing and autonomous driving is a risk to terminal value. We view growth of ridesharing and autonomous driving as a positive long-term catalyst for the fleet management business.
The Government segment offers solutions to cities and school districts including red-light, speed and bus lane camera enforcement. Most of these relationships are revenue shares and Verra maintains ownership of the hardware/cameras. Future growth will come from expanding offerings to states with limited current enforcement (i.e., only have red light cameras) and breaking into the 17 states with no photo enforcement.
While NYC is the crown jewel, and adoption in California, Florida and Connecticut would significantly move the needle, the quality of fragmented relationships with smaller cities and municipalities is underappreciated. In a recession, government revenues should be durable along with most of Parking. Most government relationships are revenue shares and Verra maintains ownership of the hardware/cameras.
On November 2nd, Verra share price had a negative reaction to its third quarter earnings, falling over 15%. We believe there were high expectations as a result of its strong second quarter, especially for the Commercial business. We identified three reasons for the strong second quarter and weaker than expected third quarter:
- A large amount of travel demand was pulled up to the second quarter, TSA Passenger Volumes grew 26% from the first to second quarter and grew only 1% in the third quarter.
- Hurricane Ian had an impact at the end of the quarter and beginning of the fourth quarter as Florida did not charge tolls for 18 days.
- Rental car buying in the second quarter typically results in a strong title registration business. The second quarter of 2022 was exceptionally strong as rental car companies bought more aggressively than normal. This resulted in a $3.5 million Q-o-Q decline, when this typically represents a $1 million headwind.
TSA data remained strong in the fourth quarter, up ~14% year-over-year but an ~3% decline from the third quarter. Based on our projections for 2023, Verra trades at over a 7.5% free cash flow yield.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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