Equifax (NYSE:EFX) is one of America’s three large credit bureaus, alongside Experian and TransUnion. Though the stock has delivered a trailing 12-month loss of almost 20 percent, there’s still quite a lot to like about Equifax as a business. Today, let’s take a look at what could make Equifax such a good stock to own in the long run.
Equifax Has a Really Wide Moat
As one of the three large credit reporting bureaus that dominate the credit market in the United States, Equifax starts off with a fairly strong natural moat. With only two significant competitors in a line of business that would likely be too large, complex and costly for new entrants, Equifax enjoys a natural barrier around its market. Better still, this market is expected to grow at a CAGR of over 11 percent through much of the rest of this decade.
An even more compelling aspect of Equifax’s competitive advantage, however, could be its Equifax Workforce Solutions unit. This business unit provides income and employment verification, an essential part of processes such as mortgage origination and employment screenings. The business provides records on over 100 million American workers sourced from large employers and payroll service providers.
This segment of Equifax’s business gives it both an advantage over the other credit bureaus and a business line that can scale beyond its credit reporting business. The Work Number, Equifax’s proprietary employment reporting system, was used in 149 million verifications last year alone. Equifax has also demonstrated significant pricing power, being able to raise its fees for TWN based on the value it provides to those seeking employment verifications.
Equifax Up Another 7%, Again
Looking at Equifax’s recent performance, it’s not difficult to see a strong growth story already emerging. In Q2, for instance, total revenues of $1.54 billion represented a gain of 7% on a year-over-year basis. Revenue from EWS climbed at a slightly higher rate of 8%, reaching $662.1 million.
On the bottom line, net income came in at $191.3 million, an increase of 17% over the year-ago period. Net margin for the trailing 12-month period has come in at a respectable 11%, closely mirrored by a 12.8 percent return on equity.
Even better for long-term investors is the fact that Equifax is expected to keep its positive performance up for quite some time. Over the coming 3-5 years, analysts expect EPS growth of over 20 percent on an annualized basis. While this may represent an overly optimistic outlook in light of macroeconomic uncertainty, it’s likely that earnings will grow at very respectable rates over the coming few years as the credit bureau market keeps expanding.
The Risks From FICO’s Latest Move
Although Equifax still has many attractive qualities, it’s imperative to note that a recent decision by Fair Isaac Corp, the issuer of the widely-used FICO score, could introduce new risks for the business. Specifically, FICO is moving to cut the credit bureaus out of its reporting process for mortgages, allowing lenders to gain access to consumer credit data directly and eliminating the markups that Equifax and other bureaus charge.
While the move is extremely recent, analysts project that it could hit the bureaus’ earnings by as much as 10 to 15 percent. Unsurprisingly, Equifax stock has fallen by almost 7 percent over the trailing 5-day period in response to this announcement. This development, however, lends credence to the value Equifax could have in EWS as a business line that is related to but still independent of its credit reporting business.
Equifax’s Dividend Growth Potential
Equifax’s dividend is currently quite modest at $2.00 per share annually, representing a yield of less than 1 percent. The past few years also haven’t delivered spectacular dividend growth, with the annualized trailing 10-year growth rate standing at just 4.7 percent. This, however, could change going forward. The forward 3-year dividend growth rate estimated by analysts is expected to come in at the much higher rate of 7.9 percent. This higher growth rate, fueled by earnings and cash flow growth, could make Equifax attractive to dividend growth investors.
In addition to rising dividends, Equifax is also using share buybacks to return cash to its shareholders. In Q2, $127 million worth of EFX shares were bought back as part of a new repurchase authorization of $3 billion. It’s worth noting that $3 billion is over 10 percent of EFX’s current total market cap, showing just how aggressively management is prioritizing buybacks at the moment. This increased rate of buybacks is also a major positive for long-term EPS growth.
Why Equifax Could Be a Good Long-Term Stock
Putting all these factors together, a rather positive picture emerges for long-term Equifax investors. The business operates in a highly insulated market where it has only two meaningful competitors, and that market is projected to grow at double-digit rates for the next several years. Equifax’s EWS business line is also growing to represent a larger and larger share of its total revenues, a fact that could even help to offset some of the effects of the recent FICO change in the long run.
In addition, Equifax is already experiencing considerable revenue growth and is using the additional cash generated by its business to prioritize buybacks. This could also translate to higher dividend growth going forward, as projected by analysts. As such, Equifax looks like a business that is delivering solid results, has a decent growth runway in front of it and is heavily focused on creating shareholder value.
This isn’t to say that EFX is without its problems. The recent decision on the part of Fair Isaac to cut the large credit bureaus out of the mortgage reporting business is a worrying development and has already put downward pressure on EFX shares. Similarly, some investors may be concerned by the stock’s valuation at 46.3 times earnings and 5.1 times sales. Even so, Equifax still appears to be a high-quality business with good long-term prospects that could be worth paying a premium for.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.