Chit Chat Stocks - Verra Mobility: A Toll Road On a Toll Road With Ben Tewey (Ticker: VRRM)

Episode Date: September 15, 2022

Verra Mobility provides smart mobility technology solutions and services. The company operates through three segments: Commercial Services; Government Solutions; and Parking Solutions. Listen as Brett and Ryan ask Ben questions about the company, its business model, and valuation. Enjoy the show! ***************************** This episode is sponsored by Stratosphere. Get started for free at stratosphere.io to get access to powerful data visualizations, specific company KPIs, and much more. ***************************** This episode is sponsored by Quartr, the new way of doing company research. Access conference calls, presentations, transcripts, and more for FREE on your mobile device. Download Quartr on the App Store here: https://apps.apple.com/us/app/quartr-investor-relations/id1552412128 Download Quartr on the Google Play Store here: https://play.google.com/store/apps/details?id=se.quartr.android ****************************** Access our “Not So Deep Dive” episodes by signing up for CCM+. Sign-up directly through Spotify or Apple Podcasts. If you listen on another podcast player, use this link and create a private RSS feed: https://anchor.fm/chitchatmoney/subscribe Need more information? Check-out our launch newsletter: https://chitchatmoney.substack.com/p/welcome-to-chit-chat-money-plus ****************************** Want updates on future shows and projects? Follow us on Twitter: https://twitter.com/chitchatmoney Interested to see more of Ben's work? Follow him on Twitter here: https://twitter.com/VestRuleCapitaI?s=20&t=1EcEAx9vTIzotQmrBsR7TA Contact us: [e-mail] Timestamps Verra Mobility | (3:53) Parking Business | (13:38) Robot Traffic Tickets | (24:55) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices

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deep dive episode where we have on an analyst to discuss a single stock. And today we have Ben Tuohy on the show. I want to give a little bit of a, I guess, a pep talk for our guest here. Ben started a blog in high school when he was a high schooler that I've actually really enjoyed. Had no idea he was a high schooler when he started it, but there's been some really, really good write-ups that he's done really comprehensive work he's still in college so he's super young but you can tell how good of an investor he already is um and we're talking about probably a company that not that many people know it's called vera mobility although you've probably interfaced with it if you are if you have a driver's license and live in a city in a big

city yes any any highlights from the interview for you yeah i mean this is it's like i think going to call maybe the episode unless we get something better the toll road of toll roads i mean it's that's a compelling pitch it really just has a take rate on a lot of speeding tickets automatic speeding tickets automated toll roads partnership with these rental car companies where you're just taking that uh just incremental fee on a lot of stuff and what i really enjoy is when it's a company that doesn't have to do much work on its own its customers do all its work for them And this, I think, describes Vero Mobility perfectly. You won't know the name of the business.

I don't think anyone knows Vero Mobility, but you'll understand the concept. It's pretty easy to understand. So I think, you know, highlights all around. And if you want to read more of Ben's work, his VEST rule is his sub stack. And it's V-E-S-T-R-U-L-E. We'll have the link in the show notes, but tons of good write-ups there. All free. All free.

Yeah. Without further ado, let's get to the interview. Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guest is not formal advice or recommendation.

Now, please enjoy this episode. Okay, welcome in. Today, we are joined by Ben Tuohy. He is the writer or author of, is it Vestral Capital? Am I getting that right? Or is it just Vestral? Just Vestral. Vestral.

Go ahead and check it out. I've been a reader for a while. And so I'm really glad that we were able to get him on. And he recently wrote up a company called Vera Mobility. So go ahead, check that out, maybe pair that with the podcast if you want. So let's start there. How did you find Vera Mobility? And then I'll talk about this, maybe the way they went public after. So how'd you find it? Yeah. So I think Vera Mobility was kind of a culmination of two different threads woven together um so being a self-proclaimed value guy um i sit down every other friday for an hour i start with a blank google doc and i just say well what does everyone

hate right now um and one of these fridays it kind of um populated the d-spac world so these are companies that have gone public via special purpose acquisition company um are now real public companies um but um they went public via this alternative route right and i figured well if i find a business or two, real businesses that make money in this whole rubble, because a lot of these companies trade at maybe $1, $2 a share, and they went public at $10. So a lot of these are busted, so to speak. So if I could find a diamond in the rough, I think that might be an interesting place to fish. So what I did was I went and I just made an A to Z list of all the public companies or companies that went public via SPAC since 2018, and just started A to Z and went through them.

It was a couple hundred companies, but it took me all the way to the V's to find a real one. Did you find a lot of... Yeah, I know. This one, the spelling, you know, that's tough on that little idea you had there. Did you find a lot of garbage, I guess, in there? Let me tell you, there are so many companies that you just, you look through and they're like, oh, we're going to 10x revenue next year. And you're like, all right, well, we'll move on.

And now you can see that they're not because the presentations were probably two years ago. Yeah. Yeah, exactly. And exactly, you just go back test and check with, well, what did management say and what actually came true? And a lot of it is fake. But I found Vero Mobility that was one of maybe two or three companies that looked real to me. And I kind of look for the same eight-ish characteristics in companies. So simple, predictable, free cash regenerative, dominant businesses, high bearish entry, earn high returns on capital, well-capitalized, strong balance sheet, averse to external risk that management can't control.

and run by able and honest shareholder-oriented managers. So kind of what Bill Ackman's or the Buffett's of the world lay out for us. So that was step one was, what do people hate right now? It was D-SPACs. And then the step two, the other thread was, I know we talked about it earlier, but I really admire the way that Conor Haley invests and his work on makings of a multibagger

and kind of the screens to run to look for inflection points. So I ran a screen looking for a company swallowing $3 billion I'm a young guy, so I don't have as much time to dedicate as professional investors. So I need to look smaller where I might have an edge that has high gross margins. I define that as 60% plus, high EBITDA margins, I'd screen for 30% plus, growing top line and trading for less than 15 times EB to EBITDA. And again, bear mobility kind of popped up. And from there, I was like, all right, well, it's time to dig in and get to work.

And you mentioned that the SPAC world has largely been thrown out. A lot of the B-SPACs have been hated. And in most cases, I would say deservedly so. But I think your approach is right, trying to find the diamonds in the rough. Does it leave any stain on Veramobility for you that they chose to go public via this route? just considering like i don't know it feels like to me well they could have ipo'd with all the you know it seemed like any company could ipo so there is just that small concern right yeah i guess maybe it was the best route for him but did it leave any sort of stain for you yeah so to tackle that

it did leave the stain right um and uh ceo talked about it he actually appeared and did like a uh a written interview just talking about the stain it did leave but i think there's some important things to point out. So as I mentioned, a lot of these D-SPACs are trading for $2 or $3. They go public at $10. So it's important to note that their mobility trades at $16, $17 on a given day. So this is a company that's trading above its SPAC IPO. So the market obviously agrees that this is a real company doing real things. I also think the sponsor is really important to look into and their incentives. So it was the Gores family. So it's Alec and gosh, I think it's Tom Gores. So the Platinum Equity Group and then the Gores Group were the sponsors for this SPAC.

And they had previous experience with carve-outs. So they did the carve-out of Verifone from Hewlett-Packard. So this is a real sponsor who's done real transactions. And having that credible sponsor will give them some, I guess, momentum going into public markets. And obviously, that's how they're trading above their SPAC IPO. And then the second thing to kind of hit on is they've done real corporate actions. So what do I mean by that? They bought back $150 million worth of stocks and it's going public and they've acquired two companies, which we can talk through later, but I think that's two more acquisitions than any other D-SPAC is going to do in their entire public company life ever. Yeah. All right. Yeah, that's a good,

those are two good reasons. Let's get into the actual business. Can you describe their different lines, their different segments? And I believe there's two large ones. And then what are kind the unit economics of each to give any of the listeners uh just some context there yeah so by way of context there's three um business segments they combined for 550 million dollars of revenue in 2021 and then the first of these i'll cover is the commercial segment that's about 47 percent of revenues and it's this is the leader in outsourced toll management um for rental car companies and fleet management companies so to shorten it i'll call them racks and fmcs which is how the company refers to them so these are the the Hertz is the

enterprises and then the Avis budget group of the world and basically the way to think about it is if a car runs the toll is their mobility job to pay that toll what they discounted electronic rate and then bill the customer at the cash rate which is usually 10 to 15 percent higher very mobility is the payment processor that collects that spread so they make money also on a five $5.95 daily fee. And then they have some other backend businesses. So this is title and registration, making sure all the vehicles are up to date. And then also if the driver runs a red light or gets caught with a traffic violation, maybe speeding, they'll bill the

customer out for the wrapper FMC. And then kind of the ecosystem to think about, you 50 tolling authorities on one side then you have your racks and fmcs and bare mobility's really integration layer between those two um so breaking down into unit economics for this segment 47 of revenues sixty percent even down margins incremental margins are higher probably 70 um and then the p l formula is kind of total number of uh cars rented in the us on a partner's fleet and you multiply that by the probability of them using play pass which is very mobility's product or running a toll during their trip so that's segment one that's commercial as you alluded to the government business is the second large business and that was 51 of revenues last year

and really they contract with municipalities such as new york chicago dallas seattle and then the 300 school districts in those areas and they maintain at this point it's probably north of 10,000 speed red light bus lane and school bus stop arm cameras. And then the razor and razor blade piece of this is that they also provide the software on the program. So the interesting part about this business is that Vera has to customize for each municipality. They have their own rules and regulations. So this is kind of a vertical market software business where you get really high barriers to scale and then you have really high switching costs. So it's tough to rip out air mobility software once it's in place um they make money basically on a fixed fee per camera

and then they take 10 of the violations revenue and then again digging into economics 70 market share in the u.s after they acquired red flex um 51 of revenues 80 of that's from this really sticky 98 retention rate um software business and then even though margins are about 40 percent. And then that will cover 98 percent of your revenues. The last two percent is this recently acquired T2 parking or the parking solutions business. It should be high single digits this year just because you get the full impact of the acquisition kind of rolling through the income statement. So call it eight to ten percent. Fifty six percent of those revenues are from actual payment processing and SAS.

23% is from maintenance services to make sure the hardware is up and running. And then 21% is from actually putting in that hardware. The overall market's $4 billion. It's growing high single digits per year. And then your customer here is your Arizona States, your Texas A&Ms of the world. So large scale universities,

they have a 44% market share there. And then they're recently trying to shift into airports and other municipalities for adjacent vertical markets to grow in. This business, again, economics-wise, 80% margins like a SaaS business, but EBITDA margins are closer to 20% just because there's some more costs to go into, and as well, the universities don't have as much money to actually spend, so they have some certain issues with that. A lot of pricing power, maybe, from those.

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on your app store by searching quarter. That's Q-U-A-R-T-R, no E. That's quarter, Q-U-A-R-T-R. Going on vacation? We're here for it. With kids who turned the backseat into a courtroom drama over whose tablet is louder, whose charger is faster, and why watching the same cartoon for the hundredth time is a human right? Yep, we totally have vehicles to handle that. Because whether it's a road trip or a business trip, where your flight's delayed, your phone's at 2%, and your dinner is whatever is open,

yep, here for that too. Enterprise, we're here for it. Do you think the parking business will benefit in any way from being under Vero Mobility's umbrella? Does Vero have the ability to accelerate growth for them? I'm trying to get to, I guess, what's the rationale for that acquisition? Yeah, so I think really what we want to do is think from first principles. What is Vero Mobility?

And I alluded to it earlier, but it's really a payment processing company. So anywhere that you can process payments, if it has something to do with transportation processing payments, Vero Mobility will probably step in there. So I think it makes sense to have it under this payment processor umbrella. Okay. What are, I guess, its largest costs? It sounds like there's some installation that's, it sounds like they're fronting that cost. Is that the biggest cost for them? Are there any other ones there? Yeah. So I think the nice part about this business is that you have little to no CAC or marketing spend that primarily falls on your racks and FMCs.

the Hertz's of the world had to go out and acquire that customer and their mobility just benefits from having a customer in the ecosystem. So they don't have to spend any cash. So you get really high incremental margins. And then if you really think about it, where does revenue come from? It comes from your variability earning a spread based on traffic volumes and then any widening of that spread between the cash and cashless toll rates. So neither of those two variables require them to put up any more money. So incremental margins are 100 percent or close to it but the real cost there's three buckets right so you have your dna uh this is depreciation for cameras and other hardware costs that's 20 of revenues let's

call it and then your other two big buckets are your operating expenses so you have operating expenses and sgna sgna is more fixed so this is your payroll uh your real estate lease expenses your insurance costs and that's call it 21 22 of revenue um and then the operating uh expenses this is where i think the variable costs come in that you alluded to uh but this is the call centers your transaction processing printing postage and mailing of all the violations and that comes out to about 30 so there's some operating leverage over the sgna but my mental model is that i think operating expenses um will stay flat at 30 or continue to 30 revenues right and that's not bad whatsoever and i guess you know getting the first introduction to this company seems like a

great business if it passed all those you know the the checklist checklist you had there is trading a decent valuation the big question i think that would come up from my on my mind and a lot of other investors mind when looking at this at first glance is where's the growth kind of kind of come from are they a small percentage of the you know the toll road and the camera market um are there any tailwinds here that they can benefit from and if so do you have any you know numbers to share yeah so just thinking about some of the growth drivers right um the commercial business you have three main drivers you can think about you have this cash to cashless conversion it's 50 in 2019 it's 64 in 2021 so that's a big covet bump i think that's stickier it's probably a better

customer value proposition, less traffic, kind of flow through the toll easier. So that's more staking revenue. I think that 64% stays. Your second is the increasing cost of road maintenance, which leads to increased number of toll roads, which I can explain. And then your third driver is really cars being rented for longer, which increases billable days, and then toll fees creeping up over time. So really, once a renter has a car, they have three choices, right? You can either choose not to drive on a toll road and drive longer. You can choose to pay in cash and have to stop at the toll operator and hand them, in these days, probably the exact change. Or you can go into VeriMobility's program, right? So naturally, when the option to pay in cash is

taken away, it's going to increase VeriMobility's take rate. Management's talked about how they are in that eighth inning of cashless tailwind. I mentioned earlier, 64% in 2021, which is up from 50% in 2019. And you can kind of track this through EZPass transactions and accounts. So EZPass accounts have 5X since 2005. And then if I remember correctly, EZPass transactions have grown, I think it's a little less than 4%, maybe 3.5% per year since 2005. So a little less than a double. I think they went from 2 billion to a little under 4 billion transactions gone through EZPass. So there's an increasing take rate of cashless over cash. And then VeriMobility will capture a large majority of that. They have exclusive contracts with Hertz Enterprise and

Avis, which is a large majority of the rental car industry. And then kind of thinking through the second tailwind, this is the increasing cost of road maintenance. PPG has stated in the past that it costs six thousand eight hundred dollars to maintain one lane mile of road um so as that number creeps up um revenue from fuel taxes is actually continuing to decline think about evs um so that's a little harder to tax um and then totally kind of emerges this alternative source of funding right so total operators control call it 6 000 miles of of road today and they've they've generated $3 million average revenue per mile. This is compared to about $150,000 or $160,000 of average revenue per mile from fuel tax.

So you also have the U.S. Tolling Authority collecting $20 billion in total revenue in 2020. So this is a big industry that can actually help build infrastructure or maintain infrastructure. And then lastly, toll revenue is creeping up. So as electronic tolls, they enable local and state governments to actually have dynamic pricing. So they can increase pricing on a whim, which the governments really like. And then as people hate. Yeah, you're describing, I think all this bull case is describing the hellish environment that is Seattle traffic. But that could be very bullish for VeriMobility.

Yeah, so I guess that's kind of the put and take around it. look if your life is getting a little bit harder maybe might as well profit off of it by investing in para right um but to kind of kind of round things out um your cars are being rented for longer this is actually a postcode to trend cars are being rented for a day longer um which is nice because fair mobility will collect the extra 5.95 um but also um you get an increased percentage or chance that people will run a toll or have a violation which variability will capture some of that revenue so you kind of culminate this all together um you get the commercial business growing low double digits um so that's the commercial business set aside and then i'll

try to be brief on the the government solutions business um so the two factors here that are really driving growth the there's an esg and a police force multiplier spin that you can put on here. The company has touted on a bunch of earnings calls that 40 Florida counties measured how much time police hours were spent dealing with these routine traffic violations. It was 95,000 hours. So just think about it. These 95,000 hours could be allocated towards something a lot more productive that can't be automated to more serious crimes, right? So you make police forces more effective. And then there's also 95% of people who die using U.S. transportation are killed on streets, highways, and roads. And that's kind of put a number around it. It's sad, but it's 350,000

deaths between 2011 and 2020. And then New York, they released numbers, which Variability runs their program, their automated traffic program. Noted there was a 70% reduction in danger speeding at camera locations um so if you can save lives and um save time it's kind of a no-brainer decision right um and then you also have un releasing their their vision zero this is uh zero traffic fatalities um i think it was by 2025 or 2030 um so there's some there's some actual government capital going into this have they started entering the european market at all yeah so So this is a great question. It kind of alludes to their acquisitions, which I talked about earlier.

But the Redflex acquisition, originally, Verimobility was 50% of the U.S. market. Redflex was 20%. So now Verimobility entity is now 70% of the U.S. market. What the Redflex acquisition also did was open up the European and Australian market for the government solutions business. So they're starting to run some traffic violations, red lights, speed cameras, operations in Australia and Europe. And that's a really big greenfield opportunity, right?

So you get in, it's tough to get people to convert at first, but once you kind of hit that critical point, a lot of municipalities switch over. It's a little more nuanced in Europe just because there's so many different countries and things like that. There's some barriers to scale, but it helps to have a one large player in the area which i can talk about later and then i know you talked about it um kind of alluding to acquisitions i want to touch on the the t2 acquisition um the thought was for management at least what they've said publicly is um when they look to acquire a company they're very roic focused and they want they either want to move slowly to adjacent markets um or strengthen their core and this was this 2-2 acquisition was more of

an adjacent market um so still processing payments but now it's for universities um and they have to do there's some parking um specific like specific things that they have to figure out um so how do you actually get students to sign up and things like that but the parking um acquisition really open up this new vertical. And then at this point, they're just going out trying to win new logos for it. If you're listening to this ad right now, we know you're already a listener to our show. But for our avid listeners, we've also started a paid membership service called Chitchat Money Plus that extends beyond just our podcast. Every Tuesday, subscribers get access to one not-so-deep-dive research episode that covers everything you need to know about a company.

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investment strategy. Sign up and become a Chitchat Money Plus subscriber today. We can't wait for you to join our community. Okay. I have one question that came to mind, and I think you may have ended up touching on this at the end of the episode, but I want to touch on it now. So you mentioned the ticketing people robotically or automatically. It sounds slightly dystopian to me as someone who probably speeds on a regular basis

to get a ticket from something as opposed to like an actual officer. I know that sounds kind of like, all right, boo-hoo for me. But if I'm not mistaken, in your write-up, you mentioned that Texas outlawed that. Do you see that as like a risk

among other states? so i think maybe the the vision listeners have right now is this like robocop coming up and giving them a ticket this is more um they're setting up um as you drive under um i guess the best way to describe it there's cameras that are above the road and as you drive under they'll either capture your license plate um for speeding or not they're not actually physically ticketing you there it's kind of like how easy pass works but with speeding um so there will be a robocop pulling you over and telling you not the speed and giving you that ticket there it'll be automated through cameras um and then it'll kind of arrive as your easy pass bill arrives

and then um can you remind me of the your second question i guess do you think it's a risk that other uh governments say we're gonna make we're gonna require it that the cop gives you a ticket as opposed to like an automatic ticketing system yeah it's a good question and you talked about it earlier with Texas. So in June 2019, Texas passed a bill that outlawed red light violations. You can't be billed or ticketed for a red light violation in Texas. So there's some puts and takes around that, but by and large, you can't. One, it's Texas. Texas has always been more on the free range, wild west part of things. But I think really, if you go back to the ESG spin on things. It's difficult to envision a world where it's better if people speed more. And I think the

only way you can incentivize people to not speed is by putting up these known traffic speed camera areas. Gotcha. All right. I think we've been getting into the risks. So I'm going to let Ryan talk about that with the question after this. But first, I want to talk management. I know it's probably important with an M&A focused strategy. And it's important in general and probably underappreciated by a lot of people. What do you think about, you know, fair mobilities management? What gives you the confidence that they're not the, they're the 1% of the SPAC people that are not the charlatans? Right. Yeah. So this is a great question. And it's kind of what I spent a lot of my time

thinking about is how I know these people are not grifting me. So my biggest concern is that they don't have much insider ownership, right? There's no insider that owns more than 1% of the company, which I found is a red flag. And maybe that's a little bit due to the SPAC going public. So there was warrants that were issued. Platinum Private Equity was a big holder. So maybe that diluted some of the management's ownership of the company. But really just the way they kind of treat shareholders. I've never seen a company who has been this open about segment costs. I really got down to the economic level just from public filings. I didn't have to talk to IR. I didn't have to go to the management team or talk to them about it. It was right there

in the public filings. They were very open about that. They had a recent turnover in CFO. And again, this just seems more of a transition thing. I remember Mobility was originally a, the entity came from a merging of two past toll authorities or speed camera authorities. And it just seemed like a natural transition for the previous CEO's career. The current CEO is again, just as open as the CEO. And I think this team is strong, but of course the jury is still out. You never know.

Okay. Now on the commercial business, or actually let's stay on management. for a second what do you think of the capital allocation strategy obviously they've made a few acquisitions have they hinted at making more or would you and i guess as your preference as a shareholder would you rather see them continue to make new acquisitions or buy back their shares yeah it's a good question so they laid out two scenarios um and their number is get to two dollars in free cash flow by 2026 or two dollars plus in free cash flow they laid out two uh scenarios to get there one is 75 m a and 25 buybacks and then 25 um m a and 75 buybacks so i think as a shareholder the m a route's a little more treacherous right you have execution

and integration risk and opportunity cost risk um and i think with the stock where it's currently trading 11 and a half times trailing 12 months EBITDA to EB. I think repurchases are more advantageous right now. I think you have more certainty around your business. You know your business more than you know another business, hopefully. So it makes a lot more sense to repurchase stocks. So I modeled out the 75% buyback, 25% M&A, and it kind of puts some numbers around that. They think they're going to generate $1.2 billion in free cash flow um over the next five years to 2026 um and then cumulatively what happened cumulatively yes okay and then with re-levering you get to another 500 million so that's 1.7 billion they

have in deployable cash uh cumulative between now and 2026 okay um on the commercial business obviously you mentioned to it uh you mentioned that the rental car companies are the racks they're very um uh results are kind of dependent on the success of those businesses how have those businesses fared in recent history i guess what are some of like the overall trends in the rental car space um and then what company we kind of follow is turo just because we own iac does this is kind of a question there's more than just turo those concepts there may be for car concept Would a ride-sharing service kind of be a headwind for VeriMobility? Yeah, both great questions. So to kind of take on the rack question first, so put some numbers

around it. 33% of revenue comes from your top three racks, so your Hertz, your Avis, Budget Group, and then your enterprises of the world. Racks, it's no secret that they struggle through the pandemic. If you shut down travel, especially business travel, it's really going to hurt them. And then the restructuring going on at Hertz was very widely covered. So looking at the industry as a whole, it's very, very concentrated. Enterprise, Hertz, and Avis have about 94% market share. So to these nationwide players, the scale and breadth of air mobility's offering is really important. We've seen billable days, like I talked about, go up 1%. So this is positively benefiting RACs. And then looking at the RAC industry,

revenues have grown four and a half, a little over four and a half percent since 2015. And then the rental days have actually grown at 5%. So that's positive for air mobility again. But overall, being a renter is not an attractive business. There's high depreciation, lots of costs, low margins. And if you kind of look at revenue trends, Hertz's revenue is flat, I think, against 2010. And I know Avis budget has done a little bit better. They've grown revenue, I think, 7% a year since 2010. But the rental car industry is a tough, tough industry to be in. And then to cover your second question, Turo, this is more nuanced and interesting, I think. And you guys can call me out for confirmation bias here, but I don't think it is a huge headwind.

I think the heuristic I use for the commercial businesses use case is anytime the owner and the driver of the vehicle are different, Ferra Mobility can step in. So that's definitely the case for Turo, right? If Turo fragments the renter side of the business, Ferra can still connect to each of the toll authorities, and it also helps them diversify their revenue, right? So that 33% hopefully could be diluted if Turo creates hundreds of thousands or millions new small rental car companies, right? So for an integration or switch company, um anytime you fragment one of the sides of the marketplace even more it helps them and would you want to see them partner specifically with a turo or some of those

other companies you know maybe trow's not the big winner there but is that what you want to see or is it just kind of you know it'll be fine even if they don't have that official partnership with uh those i don't know the ride sharing whatever not the ride sharing i keep we keep calling that whatever it's called isn't it i mean it's a ride sharing car sharing ride sharing is uber it's a little it's slightly different it's car sharing but yeah what do you want to see partnerships there so my mental model here and i studied visa and the payment processors in the past um and i think what you see visa and mastercard dualize they'll partner with every small fintech company they possibly can just in case it's the the ramp or the the next um

the next fat tail that comes up right so there's no um i guess detriment to partnering with turo or another company like them. Because if they do well, great. But if they don't, the capitalist forces, you'll eventually find the one that works out. And it would be nice to have a partnership with them in advance. Perfect. Makes sense.

We already talked about the cash generation. So why don't we go last one? Well, yeah, let's maybe talk about the valuation, I guess. You briefly mentioned some of the numbers, but why do you think, maybe go through any other valuation stuff you have, And then why do you think the market is undervaluing them? Yeah, it's a good question.

I think, though, to lay out the thesis as succinctly as I can, right, you've got a business that is growing high single digits top line. You got 40% incremental EBITDA margin, 30% return zone capital, and it can generate probably $1.2 billion in free cash flow between now and 2026. If you re-lever that, they're at three and a half times EBITDA, net debt to EBITDA, sorry. You re-lever, you get to $500 million of incremental cash there. So you get $1.7 billion of deployable cash. And I don't want to hurt myself with the math here, but I think it's a $2.5, $2.6 billion company. That's 68, 70% of the market cap is deployable in cash over the next five years and even 2.5 billion dollar market cap i don't think

you right 2.5 billion dollar market cap 3.6 ish billion dollar ev so um if you if you have 70 percent of the market cap deployable in cash over the next five years um it's an interesting spot trading for seven and a half times free uh free cash flow yield or 7.5 percent free cash flow yield. And then kind of what's weighing the stock, why does this opportunity exist? I think that there's three reasons, right? So one is you have this forced non-economic seller in Platinum Equity. They are a private equity firm that just brought a company public. They want to get liquidity for their LPs. This is creating some overhang on the stock. You have some stockholders that are afraid or potential investors that are afraid of dilution from the SPAC warrants.

So this is an incremental 25 million to 30 million shares that could be diluted over the next year. But again, they're super cash-generated. They can buy that back. They have enough cash to buy that back and actually reduce share count. And then your last one is just the whole D-SPAC world has been thrown out regardless of quality. And I think those three, let's call it short-term problems, paired with this really long-term strong business with all the secular trends we talked about, it's a pretty compelling setup.

Yeah, makes sense. I like the pitch. What would cause this to be the opposite, I guess? What would make this a poor investment? Right. This is the fun part. This is why everyone invests. This is why I doze off in lecture trying to think about how can I kill this idea, you know?

So let's say we get that crazy dilution from the SPAC warrants, call it 30 million shares. We're buying them back $22 a share. Let's call it $660 million that you have to free cash flow spent just to offset dilution. We're still sitting around 159, 160 million shares outstanding. So from there, you get maybe some headwind in the commercial business. That only grows maybe high single digits. We laid out that low double digit number, but let's say it grows high single digits just from customer churn, no pricing, and then volumes at the racks actually continue to stay flat. So that business, the commercial business, only grows maybe call it 7%, 8%. And then government solutions maybe is a GDP plus business. Maybe it's tough to get pricing power out of governments.

It's tough to win new logos and get people to convert. Your first customers are your easiest customers, so maybe it's harder, more CAC. And then the same story maybe with the parking business. So maybe you have all your big universities that are going to switch already. You got to spend more on customer acquisition again. And maybe that business only grows mid-single digits. In that scenario, my bear case scenario, I get to $1.65 in free cash flow. And then if you kind of apply today's EBITDA multiple to that, you get a flat share price, maybe a little bit down from here.

And then so that's the buyback scenario. And then management laid out the M&A scenario. With that, there's plenty of dilution, execution, integration risk. So there may be some downside as well. Okay, I think that's all the questions we have. Do you have any more? I do not. Okay.

For any listeners that want to keep up with you, what are the best places to do that? so the best place to keep up with that um there's twitter vestral capital um and then my sub stack is just vestral.substack.com all right and we'll have the link there uh in the show notes so yeah wonderful all right well we want to sign off give our disclosure here uh anything we say on this podcast is not formal advice or recommendation brett and i are not financial advisors um we are however partners at arch capital so clients may have positions in the securities discussed in this podcast. Thank you all for listening. Thanks, Ben, for coming on the show. We'll see you guys next time.