Verra Mobility Stock for Smart Transportation Solutions
Once in a great while we come across a heartwarming story, where people come together to solve the world’s greatest problems and find success along the way. No, we’re not talking about the two young men from South Africa who started a water company that reinvented the wheel when it comes to accessing clean H20 on their continent. That’s commendable and all. But we actually found a former special purpose acquisition company (SPAC) that’s not only hauling in significant revenue, but is also profitable. Of course, we had to take a look at Verra Mobility Corporation, an IoT play on smart transportation solutions for paying traffic tolls and tickets, to see what it was all about.
About Verra Mobility Stock
It seems like it’s never easy to piece together the origin story of companies that enter the markets through a backdoor SPAC deal. In the case of Verra Mobility (VRRM), the company was originally founded way, way, way back in 1987 as American Traffic Systems, which changed its name to American Traffic Solutions (ATS) in 2004. In 2017, Platinum Equity acquired ATS, which changed its name the following year to Verra Mobility. The founder of Platinum Equity is Tom Gores. The surname is one that we’ve become very familiar with of late covering SPACs. That’s because The Gores Group is a serial investor in SPAC companies, several of which we’ve covered – ESG packing company Footprint; Matterport (MTTR), a richly valued Metaverse play; Luminar (LAZR), one of several risky LiDAR stocks; and Polestar, an electric vehicle company.
Then there is Verra Mobility, which merged with Gores Holding II in 2018, before the SPAC crazy train went off the rails. (There were 48 SPAC IPOs in 2018, representing about 20% of all companies that went public that year, compared to 613, or 63%, in 2021). The founder and CEO of The Gores Group is Alec Gores. Tom and Alec are billionaire investment brothers from Israel who are living the American dream (the third, Sam, is the black sheep, a talent agent who represents celebrities like Laurence Fishburne). Why is any of this relevant? As the de facto owner of Verra Mobility, Tom Gores merged his company with his brother’s SPAC. While not illegal, the way that Verra Mobility has changed hands through private equity and SPAC deals is something of a red flag for us. But now that the SPAC deal is way behind them, let’s see if there’s anything to like here.
Vera Mobility Stock by the Numbers
On paper, there are some things to like about Verra Mobility, which automates tolling transactions and traffic violations for commercial and government customers, primarily in the United States and Canada, though the company is expanding in Europe through some recent acquisitions. On the commercial side, it automates toll and violations management, as well as title and registration, for major rental companies and large fleet management companies. On the government end, it provides automated safety solutions like red light camera systems, for cities, school districts, and more. Verra Mobility also slices and dices revenue based on product sales versus service sales. The former is much smaller and less predictable, generated solely through the sale of photo enforcement equipment in the government solutions segment.
The company has been modestly profitable – at times. Total year-to-date revenue in 2021 was $380.6 million through the first three quarters, a jump of 30% from the prior year. Net income was $22.4 million, which would put the company on pace to nearly match its performance in 2019, when it earned about $33 million on more than $448 million in revenue.
Let’s address 2018 and 2020, which both showed negative income. Regarding the former: That’s when Verra Mobility joined forces with the SPAC, blaming most of the red ink on the costs associated with the merger. It was the Rona in 2020, which makes sense given that more than a third of its commercial services revenue is concentrated in the big three rental car agencies:
Overall, toll management solutions accounted for 36% of the company’s 2020 revenues. That’s about the same percentage of revenue that Verra Mobility makes in government services related to red-light cameras, speed cameras, school bus cameras, and city bus lane cameras. The remaining 28% of 202 revenue was split between various traffic violation management solutions (7%), title and registration solutions (3%), product sales (15%), and miscellaneous government services revenue (3%).
Some of our biggest red flags with Verra Mobility involve its customer concentration. As we already noted, more than a third of its commercial services revenue relies on income from rental car companies. That was partly the difference between having a good year and a bad year in 2020. In addition, about half of the company’s revenues are concentrated in government customers, which we always score lower due to regulatory risk and red-tape bureaucracy.
In fact, Verra provides a perfect example of this risk. The company has been engaged in a months-long spat with its single largest customer, the New York City Department of Transportation, which in 2020 accounted for more than 31% of total revenues. (It’s about 25% so far in 2021.) The problem was that New York wasn’t paying its bills on time, and as of Q3-2021, the city owed Verra Mobility more than $80 million. Part of the city’s reticence apparently revolved around some camera system installation work conducted by Verra Mobility that either did not meet code or that inspectors deemed unnecessary. The company is continuing to install cameras and provide support services – and hoping the city continues to pay its bills at some point.
Verra Mobility is making some moves to diversify, particularly by expanding in Europe, beginning in at least 2018 with the acquisition of Euro Parking Collection (EPC), which specializes in collecting unpaid tolls, traffic fines, parking fines, and other fees issued to foreign-registered vehicles. In 2019, it acquired Spanish company Pagatelia, which provides electronic tolling throughout Spain, Portugal, France, and Italy. Last year, it partnered with APRR, one of Europe’s largest motorway operators, to provide toll management services to the French, who probably immediately went on strike. And last year, Verra Mobility paid about $146 million to acquire an Australian company called Redflex, which develops, manufactures, and operates “advanced sensor and image-capture technologies” that it claims are used all over the globe.
However, all of that expansion through acquisition didn’t move the needle much with international revenues accounting for just 5.6% of total revenues for the first nine months of 2021. It’s also caused the company’s debt to balloon to nearly $1 billion, and it appears to be managing the restrictive covenants that come with such a debt load. Let’s hope that continues.
Should You Buy Verra Mobility Stock?
We’re not here to give investment advice, but by now, you probably have a sense of which way we’re leaning with VRRM shares. While Verra Mobility appears to be the rare post-SPAC company capable of turning a profit, there are too many red flags for us. First, there’s a bit too much Gores brotherly love for us, though that concern may fade with time as the company continues to operate into the future and leaves its murky-ish past behind. The much bigger concern, as we just discussed, is customer concentration, along with a heavy reliance on the government as their majority customer.
Lawsuits make us nervous, and one thing we haven’t discussed yet is an ongoing legal battle between Verra Mobility and rival company PlusPass. The latter is suing the former over the 2018 acquisition of Highway Toll Administration (HTA) by Platinum Equity. PlusPass is alleging that the merger between Verra Mobility and HTA represents a monopoly in some markets and inflated prices. You can read more about the particulars here, including some serious allegations of overcharging customers for toll fees.
There’s also a more fundamental question of just how disruptive VRRM stock really is for inclusion in our Disruptive Tech Portfolio. No doubt there are some smart sensors and algorithms matching and tracking license plates, along with real-time data and analytics on road conditions, usage, and other smart city traffic solutions. However, as far as we can tell from the SEC filings, the company has yet to meaningfully monetize those sort of AI-driven analytics. Its bread and butter is collecting fees for tolls, parking, and traffic violations. And does anyone really want to invest in that with vehicle autonomy on the horizon?
Tech investing is extremely risky. Minimize your risk with our stock research, investment tools, and portfolios, and find out which tech stocks you should avoid. Become a Nanalyze Premium member and find out today!