Element Fleet’s fall from grace
Missteps push share price into nosedive
One year back t he stock was trading at $ 13.35. It closed Friday at $ 3.87, which makes Element Fleet Manage
ment Corp., a company that probably did too much too quickly, not all of it satisfactorily, one of the TSX’s worstperforming stocks.
It is an amazing fall from grace for a company generally regarded as the best in the business in North America and which made two major acquisitions ( about US$ 10 billion in total) in the last four years. That fall occurred, even though its fourth- quarter results, released Thursday, were slightly ahead of expectations and even though the company has built huge barriers to entry.
“It has a great business. It just has to run it,” said one well- placed observer, noting that, through a series of execution missteps, the best didn’t emerge.
And those missteps led to the recent resignation of chief executive Bradley Nullmeyer, a longtime associate of Element’s founder Steve Hudson: the two were partners at Newcourt Credit, an entity in a similar business that was sold to CIT Group in 1999.
Nullmeyer’s departure also coincided with a new business plan designed to create long- term value by focusing on “customers, efficiency and operational excellence,” that will cost $ 40 million in the short term but save $ 20 million in the long run.
What went wrong? Observers point to computer integration problems that occurred after Element purchased GE’s fleet management business in 2015. While waiting for the takeover to conclude, GE and Element ran parallel systems but, when the deal closed, a new and different system was put in place.
Integration issues around that new system caused Element to lose customers ( including two large clients) — though the exact number is unknown. “Everybody was doing their job ( in terms of getting business) but the system, the integral part of the process, was so messed up the customers were livid,” added one observer.
Another problem is the workings of 19 th Capital Group, a joint venture Element set up with Celadon Group in late 2016. It hasn’t been a great success: for 2017, Element r ecorded $ 121.1 million of “non- cash losses from its investment in 19th Capital.”
When customer attrition and losses with the joint venture are combined, what emerges is a “lack of clarity” on how much worse things could get. “There is a lack of visibility on two critical issues for the company,” said an observer, adding that if matters get bad enough, there could be “balance sheet issues, including breach of covenants.”
Another problem was board oversight.
“The due diligence, the projects, the scale of the migration that was undertaken was probably not prudent,” noted one observer, as was the time taken to rectify the problem and hold people accountable.
Analysts are mixed on what lies ahead. According to Bloomberg, six of the 12 rate it a buy; five call it a hold and one a sell. The oneyear price estimates range from $4 to $8.50.
On Friday, CIBC’s Paul Holden reduced his target to $ 6 from $ 8.50 because a lower P/ E multiple is justified “in consideration” of near- term balance sheet risk and a negative value of $70 million for 19th Capital. “While the implied return to our price target is high, risks are comparably high,” noted Holden.
BMO’s Tom McKinnon said bank covenant fears and leverage ratio concerns “are overdone.” He reduced his target to $8 (from $9.50), which is below book value of $8.04 a share.
Brenna Phelan from Raymond James maintained her outperform rating but cut the target to $8.50 from $11, noting Element’s share price “is reflecting a material overstatement of the risk that any additional provisions or asset impairments could lead to a covenant or funding issue.”
Calls to Element weren’t returned.