2024-01-04 00:16:23 ET
Summary
- Equifax rated Sell, more bearish than the consensus.
- Unremarkable dividend yield of less than 1%, as revenue and earnings are low or flat, impacted by weakened mortgage application volume, a risk expected to continue.
- Share price +16% above its 200-day moving average and double-digits above its autumn lows, a possible capital gain opportunity.
- Positives are equity growth and strong liquidity, along with business diversification beyond credit checks.
Stock & Industry Snapshot
You may have come across Equifax ( EFX ) over the years from those offers of free credit scores or reports, or perhaps you have had a report pulled by them in order to get a loan or for an employment background check, but today we will dive deeper into this company and decide if it is worth adding to our investment portfolio.
Some quick facts about this company are that it calls itself a global data, analytics, and technology company.
Headquartered in Atlanta and with roots going back to 1899, it trades on the NYSE and does business in 24 countries while boasting of 14,000 employees. Its solutions run the spectrum of credit risk, verification, identity fraud protection, as well as analytics-driven targeted marketing.
This is my first time rating this stock, and I'll be referring to earnings data released on Oct. 18th, while the next release is not until Feb. 8th.
Scoring Matrix
We use a 9-point scoring method that looks at this stock holistically and assigns a total rating score, using a score matrix.
Today's Rating
Based on the score total in the score matrix , this stock is getting a rating of sell.
Compared to the consensus rating on Seeking Alpha, I am being more bearish than the consensus on this one.
Equifax - rating consensus (Seeking Alpha)
Dividend Income Growth
The following is the 10-year dividend growth chart :
What it can tell a dividend-income investor is that the annual dividend went from $1/share in 2014 to $1.56/share by 2023, a 56% increase in 10 years. We can also see that it has not really grown between 2017 and 2023 at all. In fact, the dividend history shows it to be the same for 2023 as the prior year.
My future growth potential is tepid, considering that earnings have been on a decline however free cash flow has been positive lately. Poor earnings figures, I think, lessen the chance the company will increase dividend rate significantly.
I would call it a buy rather than a strong buy in this case, for proven dividend stability rather than serious growth potential, since quarterly payouts of $0.39/share have been steady and uninterrupted or reduced.
Dividend Yield vs. Peers
The following chart uses Seeking Alpha's dividend yield comparison tool. Here we are comparing the dividend yield of Equifax against three peers who have some similar business lines, to determine where we can get the best yield on capital invested.
What this data tells us is that the yield for Equifax is nearly last in this peer group at 0.65% , so barely hitting 1%. Dun & Bradstreet ( DNB ) leads the pack with a 1.72% yield, giving me the best dividend return on capital invested.
Other peers here include Verisk Analytics ( VRSK ) and Thomson Reuters ( TRI ).
Considering that Equifax has a share price in the $200 range, and only a $0.39/share dividend, I think it does not present a great dividend yield opportunity.
In this category, I would call it a sell.
Revenue Growth
In this section, we are looking at revenue growth from the income statement .
What the data shows us is revenue increased to $1.31B in the quarter ending Sep 2023, vs $1.24B in Sept 2022, a 5.6% YoY growth.
One negative impact to sales the company mentioned in its remarks is "weaker than expected mortgage market estimated to be down 29% based on Equifax mortgage credit inquiries."
Some tailwinds to sales came from "workforce solutions non-mortgage revenue up a strong 11% from very strong Government growth," and international revenue that "grew 10% on a reported basis and 12% on a local currency basis."
Nevertheless, looking forward to full-year FY23 results and going into FY24, I am not too optimistic about this company since it revised its top and bottom line estimates downward already and is facing headwinds from a major business segment: mortgage credit inquiries.
According to their Q3 remarks:
We expect the weaker U.S. mortgage market at current high interest rates to continue in the fourth quarter, and we now expect full year Equifax mortgage credit inquiries to decline about 34%, which is down over 3 percentage points from our prior framework.
I will call it a hold in this category, on the basis that revenue did grow on a YoY basis but mortgage market weakness will continue to impact this business, and at a macro level it appears interest rates will not start coming down just yet. Rate tracker CME Fedwatch predicts the Fed's March meeting will be when we start to see a drop in the Fed policy rate, so it at least tells us rates are not expected to rise further.
Earnings Growth
Also from the income statement , the data tells us that net income (earnings) were practically flat on a YoY basis, dropping to $162MM vs $165.7MM in Sept 2022, a slight 2.2% decline.
From the data, we can see a combination of low YoY revenue growth combined with a spike in operating expenses and interest expenses.
As far as full-year FY23 outlook, the company has already called for a YoY decline in earnings per share:
Worth mentioning, since revenue can impact earnings, is that this company is diversified across several business segments and geographics. For instance, the graphic below shows Q3 performance with growth in certain segments and geographies despite declines in the mortgage segment and in certain regions. For instance, Latin America saw a +48% revenue growth.
Equifax - business diversification (company Q3 results)
Again as in the revenue category, I will call this stock a hold , as earnings were practically flat, and while there are headwinds to the mortgage segment and expected YoY declines in the EPS, there is also growth potential in non-mortgage segments and in various geographies, so I believe this will help out the bottom-line going into 2024.
Equity Positive Growth
From balance sheet data , a positive point to mention is that total equity (book value) has actually gone up to $4.4B, vs $3.7B in Sept 2022, an 18.9% YoY growth.
Although long-term debt has grown to $5.5B, so have total assets which have grown to $12.34B. So, debt is about 44% of total assets right now.
Related to this topic is whether the firm can continue into 2024 as a viable business, from a liquidity standpoint, and my answer is yes. Take a look at the graphic below, which highlights moderately good credit ratings, strong liquidity, over +$400MM in cash, and what appears to be borrowing capacity of +$1B.
In the category of equity, as the evidence supports it I will call this stock a buy.
Share Price vs. Moving Average
The YCharts below shows this stock's share price now up to $239.87, a whole +16.6% above its 200-day SMA.
My portfolio strategy does not look at this chart and immediately consider it overpriced, though, but rather I take this in the larger context of earnings, revenue, and equity growth as well as the dividend yield.
What we know is the price is 16% above its long-term average and well above its autumn dip, while at the same time, earnings were nearly flat, revenue barely grew 6%, and equity grew nearly 19%. Not to mention, the dividend yield is less than 1%.
The equity growth aside, I would call this a sell opportunity at this price especially for someone who bought into the autumn dip, since a +$70/share capital gain can be realized (that is +$7,000 in capital gains on 100 shares).
In addition, I don't see it as a buying opportunity at this price since the revenue and earnings are flat/weak, and the dividend yield is dismal, so not much of a dividend play either to buy because of a great yield, especially now in the age of high-yielding bank CDs and treasuries.
Valuation: Price-to-Earnings
The valuation data can tell us that the forward P/E ratio has climbed to 51.49, which is +135% above its sector average.
What I think is driving this is clear and this is evidenced by the data I already discussed: a share price climbing double digits vs its moving average, while earnings remained relatively flat. It creates a wide rift between share price and earnings in this case.
Of this peer group, I would go with Thomson Reuters on P/E valuation as it has a price multiple of just 29.6x earnings, while earnings grew +61% YoY.
In this context, I will call Equifax a sell due to having extreme overvaluation , as the market is unjustifiably driving the price up even as earnings are flat. Had earnings shown at least a 10% YoY growth, I would have called it a hold at least, and we also know that there is a downward-revised EPS estimate for the year and expected continued headwinds in the mortgage segment.
Valuation: Price-to-Book Value
Also from valuation data , we can see that the forward P/B ratio has jumped to 6.51, which is +141% vs the sector average.
I think the driver of this elevated multiple is clearly the overly bullish share price.
However, unlike the flat earnings, book value (equity) actually grew by double digits and now the firm has over +$4B in equity.
In that type of scenario (rising share price along with rising equity), I call this more of a hold at 6.5x book value. Had it been a case of falling equity and rising share price, I would have called it a sell. A buy opportunity I would consider if the equity grew by double digits and share price was trading around or below average.
I welcome your feedback in the comments section on your own approach to valuation and its role in buying, holding, or selling this stock.
Risk Analysis
Since it was already mentioned as a notable item, the risk of declining demand for mortgages in a high interest-rate environment certainly can impact a business like this, even though they are not solely tied to that one product. It is a risk impact, nevertheless, since it impacts potential future revenue and earnings in 2024.
The following graphic from Equifax is a great visual on the problem: as the interest-rate environment heated up, home loans became more costly and so demand for them declined, causing a decline in credit-check inquiries:
Equifax - decline in mortgage inquiries (company q3 results)
From third-party sources and media, we see a similar scenario:
Late-year headlines in CNBC reported "mortgage demand down 9.4% for final week of 2023, despite recent drop in interest rates."
Morningstar reported in an early January 2024 article that the situation is also impacting refinancing:
Buyer demand decreased as buyers struggled to find homes for sale. The purchase index - which measures mortgage applications for the purchase of a home - fell 5% from two weeks ago.
Refinancing activity also dropped, as homeowners held off on doing so.
A few weeks, Kiplinger magazine also had this to say:
The Market Composite Index, which measures mortgage loan application volume, decreased 1.5% on a seasonally adjusted basis from the prior week, and decreased 3% on an unadjusted basis.
So, the evidence points to mortgage application headwinds going into 2024, which I think ties into the company's own remarks I mentioned earlier. Even though it is a diversified company, this remains a business impact and moderate risk to consider as it impacts revenue and earnings.
With that said, I would call this stock a sell in this category of risk.
Quick Summary
To summarize, from a holistic standpoint considering all the factors mentioned I am taking a bearish stance on this stock and calling it a sell.
Key drivers of this sentiment are weak or flat earnings and revenue growth combined with a skyrocketing share price double-digits above its average. The dividend yield of less than 1% is also nothing remarkable to buy into.
My portfolio strategy here would be to take a capital gain if I can, particularly at the current price. I am not sure it has a lot more upside potential in 2024 considering the evidence I presented.
Once again, I am looking at a great price spread opportunity here, between any entry point this summer/autumn and the current price, before it drops again.
Equifax - price spread (ycharts)
For further details see:
Equifax: Great Time To Sell At This Price, As Tepid Mortgage Demand Weighs On Earnings