2023-04-25 12:20:01 ET
Summary
- Experian provides data services to help clients with credit solutions.
- Organic growth has been strong, as global credit markets have further developed.
- Experian is the market leader, allowing the business to gain handsomely. It has conducted M&A to support its core business.
- Margins are fantastic (NIM of 15%), with scope for improvement in the coming years.
- Experian looks undervalued relative to its peers, who are growing quicker but are far less profitable.
Investment thesis
Our current investment thesis is:
- Experian is the leader in credit data, boasting high barriers to entry, strong margins, and sustainable growth.
- Credit expansion has been strong in the last decade, with trends globally suggesting this will continue.
- Experian is diversified by services, geography, and business line while actively conducting M&A to support expansion.
- Experian's valuation suggests upside relative to its peers, who are choosing growth over margins.
Company description
Experian plc ( EXPGF / EXPGY ) is a technology company that operates through two segments, Business-to-Business, and Consumer Services.
The company provides data services to help clients identify and understand customers, manage lending risks, and provide analytical and decision tools to enhance businesses' customer management. It also provides financial education, free access to credit reports and scores, and applications to manage finances and protect against identity fraud.
Share price
Experian's share price has generated strong returns over the last decade, with over 100% gains. This has been driven by sustained growth and a continued market-leading position.
Financial analysis
Presented above is Experian's financial performance for the last decade. Experian services are provided primarily to businesses, monetizing its large dataset to help achieve optimal decisions.
Revenue
Experian has grown its revenue at a CAGR of 3%, which is relatively soft during a decade of rapid credit expansion. As a UK-listed global business that reports in Dollars, Experian is subjective to FX risk. Following a decade of the Dollar strengthening against currencies such as the Sterling, we have seen some performance flattening. Further, the business conducted a portfolio review in FY16, followed by divestments . This muddies the fundamental analysis of the business. For this reason, we present organic revenue growth below.
As touched on previously, one of the driving forces of this is a rapid expansion of credit globally. The following graphs, although relating only to the US, illustrates this perfectly.
Housing is always the core aspect of debt development and so an upward trend such as this is fantastic for Experian. Further, non-housing is increasing at an even greater rate, driven in large part by student loans.
Experian is essentially a broker for data and for every loan that drives the above graph, lenders require said data to make their decision. The company is a gatekeeper to debt.
Experian is not the only one but is the largest. Alongside Equifax ( EFX ) and TransUnion ( TRU ), the global credit data market is dominated. For this reason, the industry has extremely high barriers to entry, making it extremely difficult for market share to be materially disrupted. The big 3 are in competition but are essentially carving up the planet, leaving enough room for all three to thrive.
Although organic growth underpins Experian's development, the company has been active with acquisitions. This looks to be a strong combination as the inorganic growth is primarily targeted toward new geographies, new markets, and product innovation. These are all segments in which Experian has a degree of inferiority in expertise. Therefore, Experian can leverage its size to acquire said expertise.
As mentioned, Experian is highly diversified, the degree to which is impressive. No business activity comprises more than 55%, no geography more than 65%, and no customer by 40%. This insulates the business against potential market shocks while giving exposure to changing growth dynamics globally.
Further, Experian is attempting to invest in higher growth markets, utilizing its current experts to refine its focus. The impact of this is not clearly identifiable yet but importantly, these avenues are within the company's area of expertise.
Economic considerations
Current economic conditions are an issue for Experian. In response to heightened inflation, we have seen interest rates rising rapidly around the globe.
With rates rising, the ability to obtain a loan declines as default risk increases. Further, many consumers are priced out of borrowing or lose the ability to, as living costs rise. These factors contribute to a decline in lending and thus the services provided by Experian.
Looking at quarterly data, we have seen a material decline in mortgages, as well as a general softening across the consumer services segments. This being said the diversification impact is in full effect, with LatAm driving growth and offsetting weakness in other areas. Further, product diversification also helps, as seen in NA Data, where despite a decline in mortgages, the segment has still grown.
A slight concern is the weakness in EMEA/APAC, which looks to be lagging behind the other segments. This is the smallest part of the group and so not a major concern.
Margin
Margins are a key financial concern for us, with Experian experiencing a decline across the historical period. This is less concerning at a NI and EBIT level, but regardless is a concern for what is a mature business with pricing power.
In the most recent periods, this has been partially driven by weakness in the EMEA/APAC segment, which is currently loss-making at an EBIT level.
Presented below is Experian's current cost profile. The ideal profile would be 100% variable, as it would respond perfectly to a change in operations, with no margin contraction. The below suggests a good degree of flexibility, which should allow for efficiencies to be found as a means of improving margins. Management is currently forecasting some improvement.
H1 download
As the above table illustrates, Experian has seen resilient financial performance during difficult trading conditions.
Looking ahead, we expect rates to remain elevated at least until the end of the year, which could mean H2 comes in at a lower level than this if things begin to deteriorate. Our perspective is that organic growth of 5-10% for the full year would be strong and the pipeline suggests this is possible.
Balance sheet
Experian operates asset-light and lean, reflected in its ROE which is 28% in the LTM period.
Management also operate the business conservatively, with a current ND/EBITDA ratio of 2.15x. This leaves sufficient flexibility should the business need to raise debt in the future. Its current debt profile is fantastic, with the majority of debt fixed and maturity unwinding from FY24 onward.
Given these factors in conjunction with Experian's profitability, the company is a cash machine. Distributions have come in the form of both dividends and buybacks, which have been consistent outside of the Covid-impacted period.
The absolute value of distributions may not be sufficient for some but we must factor in that Experian is consistently investing in acquisitions. CFO has been over $1.4BN in 5 of the last 10 years and has always exceeded $1.15BN.
Outlook
Management is forecasting 7-9% organic growth, which will likely translate to 4-6% on an actual FX basis. Further, modest margin improvement is expected, although the impact of FX looks concerning but is a reflection of current conditions.
Conversely, above is Wall Street's consensus for the coming 5 years. Growth is in line with Management's forecast, which looks reasonable based on historical performance and the continued impact of acquisitions.
Margin improvement is expected to be strong throughout the period. Although this is key for us, the degree forecast looks optimistic given the historical track record.
Peer analysis
In order to assess Experian's relative performance, we have compared it to both Equifax and TransUnion on a financial basis.
Growth is a weakness for Experian, lagging behind both comps on a revenue and profitability basis. The forward expectations look stronger, which likely reflects the resilience of the business in its leading position.
FX is one of the reasons for this underperformance but all 3 businesses are exposed. TransUnion, for example, has been aggressive with M&A, which is one of the reasons for the strong growth.
Profitability is the area in which Experian shines. Looking at GPM or EBITDA may look concerning but for a mature business, FCF and NI are more important. Investor returns are substantially higher with Experian, allowing greater distributions and reinvestment.
Valuation
Experian looks attractively valued, with a lower P/E ratio than both businesses and a lower forward EBITDA than Equifax.
TransUnion is another business we are researching and note that the business is acquiring margin-dilutive businesses, so growth needs to be considered with a pinch of salt. Profits are king and Experian continues to win.
Key risks with our thesis
The risks to our current thesis are:
- A credit event. With rates already causing issues in the banking space, uncertainty remains economically as to what the ramifications will be. Consumer debt is at an all-time high and as we have seen during the GFC, if the dominos begin falling, we quickly find ourselves in calamity.
- Margin contraction. Margins are strong due to Experian's bottom-line performance. Growth is already fighting FX, the business should not make long-term improvement more difficult.
- FX. During difficult economic periods, capital flight is always toward safe-havens. In the 21st century, this is the USD. A strengthening dollar means more foreign currency is required to buy the same amount of USD, deteriorating foreign earnings. If this occurs to a greater degree than forecast, we could see top-line underperform while organic remains strong, sending deceiving signals to the market.
Final thoughts
Experian has all the hallmarks of a fantastic business. It is in a monopolistic position, with a large market share, high barriers to entry, and great margins. The fundamental commercial profile is attractive and organic growth reflects this. This company feels like a "buy-and-forget" option regardless of valuation, as the factors listed above partner rising distributions and growth through global development. The cherry on the cake here is that we see upside today.
For further details see:
Experian: Market Leader, High Barriers, Great Margins