2023-08-16 11:39:00 ET
Summary
- Dun & Bradstreet's organic growth continues to accelerate, with 2Q23 results exceeding expectations.
- The company's headline organic growth for its North American revenues might be slow, but Sales and Marketing Solutions continue to be strong.
- International sales are also strong, with solid organic growth and an increased vitality index, supporting future growth projections.
Summary
Following my coverage on Dun & Bradstreet (DNB), I recommended a buy rating due to my expectation that organic growth would start to accelerate to mid-single digits. This post is to provide an update on my thoughts on the business and stock. 2Q23 results were splendid, in my opinion, as organic growth continues to accelerate. With the ongoing strength, I am starting to see a possibility for DNB to accelerate its organic growth to the guided range management called out during the investor day.
Investment thesis
DNB had another fantastic quarter, with revenue up 3.2% to $554.7 million and 200 basis points more than what consensus expected. Better yet, organic growth of 3.9% is still climbing steadily toward the middle of the single digits. The 2Q23 results confirmed my anticipation of a sustained acceleration in organic growth. Some investors' worries that DNB's international exposure could have a negative effect on earnings due to fluctuations in FX rates should have been allayed by the 2Q23 results. I would point out that this is the second quarter of sequential acceleration in terms of organic growth (2.2% in 4Q22 to 3.2% in 1Q23 to 3.9% in 2Q23). Importantly, the core business is doing well, accounting for 90% of total revenue growth and 5.5% organic growth, with the remaining 10% (public sector and credibility solutions) falling behind. Since Q2 was so strong and Q4 has a less difficult comparison, I believe organic growth will at least meet the midpoint of management's guidance of 3.5 to 4.5% for 2023.
Taking a deeper look into DNB's geographical performance, the company's North American revenues in 2Q23 were $392 million, an increase of 2.8% year over year. I believe that analyzing the underlying verticals is a more accurate way to evaluate this, despite the fact that it is still behind the mid-single-digit growth expectation. Organic growth in North America is 5% for Sales and Marketing Solutions. In addition, management identified the SMB market as a key area for expansion. With the launch of D-U-N-S Registered Seal in North America, I expect DNB to start seeing incremental demand from SMBs.
On the new solutions side, we launched the D-U-N-S Registered seal in North America, with direct integration into our D&B business directory. If you recall, the D-U-N-S Registered seal is one of our most successful products in the Asian market and allow small businesses to promote themselves as a legitimate entity with a sound financial and regulatory profile. (2Q23 earnings results call)
More specifically, I anticipate things will improve as DNB continues to invest in the Sales and Marketing segment, an area in which they have historically underinvested. The simplified deployment of solutions and improved pricing that result from the solution's modernization should encourage more cross- and up-selling, which in turn boosts organic growth.
As we continue to invest and innovate in Sales and Marketing and in Finance and Risk, we see a strong uptake of our new solutions, which further supports our now 25% vitality index in North America.
But certainly, the solutions that we're offering are very mission-critical in the Sales and Marketing space. And so they're stickier than you might expect. And I think that also helps with the consistent growth that we're seeing in that business. (2Q23 earnings results call)
I think the 2Q23 results have calmed nerves about International, one of the areas of concern due to FX risk. At $163 million, 2Q23 international sales showed solid organic growth of 6.5%. It's important to note that the strength was widespread, affecting both the finance and risk sectors and the sales and marketing sectors. In particular, the International Vitality index rose 500 basis points (bps) from the previous period to 33%, which is encouraging news for future organic growth. The double digit % increase in sales from enterprise accounts is especially encouraging, as this segment represents a critical international expansion strategy.
This drove a 500 basis point sequential increase in our Vitality Index to 33%. We saw healthy demand across both Finance and Risk and Sales and Marketing offerings, particularly within Risk and Compliance Solutions, consistent trends that we saw in North America. (2Q23 earnings results call)
I'm still bullish on the stock after another strong quarter of performance in spite of the challenging economic environment. As the company's organic revenue growth has been on the upswing, I have maintained my faith in management's ability to achieve its 5-7% organic revenue growth and 50-100 bps of annual EBITDA margin expansion targets over the next few years.
Valuation
I believe the fair value for DNB based on my DCF model is $14. My model assumptions are that DNB will achieve what management is guiding for in the medium term (EPS growth of HSD to the low teens). Given the execution strength and momentum shown so far, I am getting more optimistic that DNB can achieve this target. Note that my DCF model uses FCF instead of EPS; as such, even if EPS comes in at high single digits, the impact from deleveraging and lower CAPEX as a percentage of revenue will boost FCF growth as well.
Conclusion
DNB delivered a splendid 2Q23 performance, marked by accelerating organic growth. Concerns over international exposure should have also been addressed by strong results, with 2Q23 international sales growing 6.5% organically and an increased vitality index of 33%. The continuous climb in organic growth, reinforced by consecutive quarters of acceleration, supports management's growth projections. All in all, DNB's robust performance reaffirms my bullish outlook, as the company's execution strength aligns with its medium term growth targets.
For further details see:
Dun & Bradstreet: Splendid Q2 2023 As Organic Growth Continues To Accelerate