2024-01-15 07:48:08 ET
Summary
- Experian’s recent performance has been strong despite difficult economic conditions and a tight debt market. Innovation, diversification, and superior execution are driving outperformance.
- We believe its combination of data-asset improvement and product development will drive an improvement in its growth trajectory, alongside potential margin improvement.
- A decline in US rates in 2024 represents a key potential catalyst ahead, even as its consumer businesses globally perform respectably.
- Experian is outperforming its direct peers and wider comparable companies, with a ROIC of 11% (ROE 27%), an EBITDA-M of 28%, and a FCF yield of 23%.
- Experian is no longer undervalued but we still consider the company a buy on quality. At a FCF yield of ~4%, it is still yielding attractively.
Investment thesis
Our current investment thesis is:
- Experian is a high-quality business that has only developed positively during the last decade. Management has consistently innovated, albeit slowly, to create a consumer finance powerhouse with monopolistic characteristics.
- Where its peers have aggressively conducted M&A and invested excess capital brazenly, Experian has protected its impressive ROE to ensure an efficient allocation of shareholders’ capital. With TransUnion’s (for example ROE turning negative and in freefall prior to this, investors must ask themselves where their capital is better placed long-term.
- For these reasons, even if Experian is not clearly undervalued, it is still a clear buy.
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 1Y share performance has been respectable, returning ~16% to shareholders while the S&P500 has exceeded this marginally at +24%.
We covered Experian in Apr23 , rating the stock a buy based on its impressive commercial position and the belief it was undervalued (stock up +15% since then). For a detailed analysis of its business model, consider this paper as we will not go into the same detail here.
Financial analysis
Presented above are Experian's financial results on a half-year basis, as is reporting custom in the UK.
Recent financial performance
Experian’s financial performance has been impressive when contextualized by the current economic conditions globally, with top-line revenue growth of +12%, +5%, +5%, and +6% in its last four half-years.
In conjunction with this, its EBITDA margin has stabilized following an extended period of decline, implying the possibility of an increase by at least 1ppt for the first time since FY16.
The company’s growth has been delivered across all of its key business lines and geographies, with its B2B segment up +5% and B2C up +6%. Further, North America is up +4%, LatAm up +13%, UKI up +1%, and EMEA & APAC up +9% in H1’24.
North America
Growth in NA is driven by the economic strength observed in the US, with Consumer Services delivering strong growth from its leading membership position. Key areas include Verification Services, Automotive, Targeting, and Health. Unlike much of the West, the US’ performance has been undeniably strong, trickling through to Experian.
LatAm
Brazil continues to be Experian’s area of strength, with the company benefiting from secular tailwinds and a growing client base. Experian is rapidly expanding its verticals to maintain its trajectory and broaden its ecosystem, positioning it for long-term success. Economic development and financial modernization will support growth.
UKI
The UK has struggled with a material softening in its growth trajectory, with most metrics at neutral, owing to tight credit conditions and elevated inflation. Despite this, Experian has executed well, capturing growth and limiting its downside exposure.
EMEA and APAC
Management’s current focus is on execution, seeking to improve market share capture in its key product offerings, allowing for an improvement in financial performance.
Management’s current strategic highlights include:
- Enhancing its data assets - Its free membership program, Experian Boost service in the US, and BNPL integration have contributed to a significant increase in data.
- World-class integrated platforms and new verticals - Experian has executed exceptionally with the development of its platforms ( PowerCurve being the clear leader (TCV of ~$490m)) expansion into new verticals (growing market share in the verification segment), and development in its existing verticals through innovation (Experian Activate (targeted offers), Experian Smart Money (help building credit).
Experian, unlike many of its peers, has been consistently innovating in the consumer finance space. The company has been nudging incrementally beyond its area of expertise, gradually increasing its sphere of influence. Experian Smart Money is the perfect example of this, which is a digital checking account and debit card with embedded Experian Boost. It leverages the company’s brand in the credit-building segment and also its expertise in consumer understanding, while creating a new revenue channel in a new vertical. Further, the company is leveraging changing industry dynamics to its benefit, such as the BNPL trend.
Economic & external consideration
Economic conditions are incredibly important to the long-term success of Experian. With expansionary policy comes an increase in activity, due to the lower cost of capital, contributing to demand for Experian’s services. This comes from increased credit checks, increased verification with economic expansion, and increased activity in segments such as Automotive and Mortgages.
The converse has been the case in recent years, with rates rapidly increasing across the West in response to inflation. This is primarily the reason for Experian’s growth slowdown in FY23 and LTM23, although we should state that we are impressed by its resilience. The long-held belief is that Credit Agencies should be highly cyclical, which does not appear to be the case with Experian. At the same time, Equifax’s ( EFX ) FY22 growth was +4% and its LTM23 growth is +0.3%, alongside margin erosion. TransUnion’s ( TRU ) case is similar.
We attribute this success to a combination of Experian’s strong execution, diversified revenue profile, and quality businesses.
Looking ahead, we suspect rates will decline in the US in the second half of 2024, followed by other Western nations. This will be a key catalyst for Experian to experience an acceleration in its growth.
Margins
Experian’s margins have trended down slightly during the last decade, although this has not been overly concerning to markets. This is a reflection of developing market dynamics, with increased competition and technological innovation contributing to erosion.
Product development and scaling have contributed to a slowing decline in recent years, with Experian primed to generate an improvement for the first time since FY16 once a market upswing is initiated.
Balance sheet & cash flows
Experian is conservatively financed, with a ND/EBITDA ratio of 1.7x. This provides the company with the flexibility to finance M&A and increased distributions if Management desires to be more aggressive. Its current capital allocation approach is more conservative, however, broadly expending FCF for its outgoings.
Consistent buybacks and dividends (~1.5% yield, +4% growth) have contributed to a growing EPS (+4%) and an impressively consistent return on equity/IC. As Charlie Munger stated, “ Over the long term, it's hard for a stock to earn a much better return than the business which underlies it earns ”.
Outlook
Presented above is Wall Street's consensus view on the coming years.
Analysts are forecasting healthy growth into FY28F, alongside incremental margin improvement. We broadly concur with these estimates, as Experian’s mid-single-digit trajectory currently implies the company should achieve high-single-digits as rates decline globally.
Further, it is worth highlighting its impressive execution currently has contributed to an upward revision by analysts, with FY27F revenue up +3.3% and Adj. EBITDA is up +28% compared to when we last covered the stock.
Industry analysis
Presented above is a comparison of Experian's growth and profitability to the average of its industry, as defined by Seeking Alpha (32 companies).
Experian performs well relative to a cohort of comparable companies. The company’s margins are considerably higher while its growth is marginally below average. Given the company’s scale and market-leading position, broadly matching growth is impressive.
We attribute this performance to supreme execution in conjunction with a strong strategic direction.
Direct peer analysis
Presented above is a comparison of Experian to its direct peers, Equifax and Transunion.
To narrow our analysis, we have also directly compared Experian to its monopolistic peers. Experian flexes its leadership position in our view. The company is slightly lacking in growth and its EBITDA margin, but has a superior FCF margin and ROE.
While its peers, particularly TransUnion, have gone on an aggressive diversification spree with M&A and completely new verticals, Experian has remained within its competencies. This “slower” approach has protected shareholders’ capital in our view, with its ROE more than double its peers’ average ( and this is based on TransUnion’s FY21 ROE, as it is currently negative ). TransUnion and Equifax must show its shareholders an adequate return for the investments it has made in recent years, while Experian is doing so already at a far lower risk profile.
Valuation
Experian is currently trading at 21x LTM EBITDA and 16x NTM EBITDA. This is a premium to its historical average.
Despite the company’s margin erosion, we do believe a margin premium is justifiable. This is primarily due to the innovation in its business model and impressive execution thus far, illustrating an incredibly strong company and Management team. Margins are all well and good until a company is rendered obsolete. This is not a fear we have with Experian.
Further, Experian is trading at a small premium to the wider cohort of comparable companies (~10-15%), not wholly quantifying its margin and ROE positive delta in our view.
Further, Experian is trading at a small premium to its peers on an LTM EBITDA basis (+8%), while at a discount on a NTM EBITDA basis (-9%). Our view is that Experian’s strong financial performance and superior returns warrant a 10% premium to its peers, which implies upside of 2-20%. We assign greater weighting toward the LTM metric, implying small upside.
Across all three considerations, Experian appears broadly appropriately valued, although does not clearly suggest upside, unlike when we previously analyzed the company.
Key risks with our thesis
The risks to our current thesis are:
- A credit event prior to rates declining.
- A delay in a decline in rates due to sticky inflation.
- Economic downturn prior to a decline in rates.
- Global FX translation to Sterling
Final thoughts
Experian is a fantastic company in our view. The company has innovated, modernized, and developed its competitive position consistently throughout the last decade, always with consideration for shareholder returns. Unlike many within the industry, this has safeguarded and enhanced shareholder value, at a time when its peers have levered and spent greatly on M&A.
Looking ahead, we expect Experian to continually chip away at its competitors’ market share, contributing to consistent revenue growth and potential margin appreciation.
We stated the following in our prior analysis and wholly hearted maintain this view currently “ This company feels like a "buy-and-forget" option regardless of valuation ”.
For further details see:
Experian plc: Long-Term Compounder Outperforming Its Peers