2023-10-31 04:14:11 ET
Summary
- TransUnion's stock price has dropped significantly due to slowed lending in the economy, disappointing Q3 performance, and guidance revisions.
- Although the market's expectations of TransUnion are dim, I'm optimistic, believing the market recently oversold and currently the share price is reasonably cheap.
- In my last article, I wrote about TransUnion's good business model and growth opportunities - and with the recent selloff, there are finally potential buying opportunities for long-term investors.
Introduction
Since the last article, ' TransUnion : A Great Business, But Quite Expensive' the stock was trading at $77.4 US per share. My thesis was simple - TransUnion ( TRU ) had a great surrounding business model, but the big risk was the macro: rising interest rates and slowed consumer lending. And although the company was a great long-term hold, it was too expensive to enter. Since September, the stock treaded lower towards $65, and this week, the stock dropped to $44 in three days. Although the market is fearful, I finally see an opportunity for investment.
Recent Market Selloff
On October 24th TransUnion published its Q3 10Q report - revealing disappointing performance in its bottom line. Despite publishing a 3% YOY revenue growth, with 2% in the US and 12% internationally, the company's Q3 EPS amounted to a loss of $2.07 per share. Q3 losses mostly resulted from a $495 million goodwill impairment on TransUnion's UK segment, reflecting expectations of weaker performance amid a slower economic recovery. Moreover, the company also published revenue and earnings guidance, below analyst estimates - leading Bank of America to downgrade the stock from Buy to Underperform .
Share Pricing (Image Created by Author)
Equifax, on October 23rd, also published its Q3 report , with sales and earnings both holding strong, experiencing a mere ~8% drop in share price (due to weakened performance guidance). This means TRU's recent drop of ~25% in the span of three days more so reflects the perception of company weakness, rather than overall industry weakness (which albeit is still weak).
Recent Overselling
Let's just first look at the selloff in the past week. TransUnion's shares dropped 25% - I would say roughly half was due to guidance revisions and half was due to the UK segment's goodwill impairment. Here's why that's likely unimportant:
Guidance Revisions:
The Motley Fool does a pretty good job summarizing the revision :
Fourth-quarter revenue is now expected to range from only $917 million to $932 million. (Wall Street was hoping for $975 million.) Adjusted profits are expected to range from $0.67 to $0.72 per share. (Wall Street wants $0.98.) And actual GAAP earnings, while positive, will be even weaker than that - anywhere from $0.08 to $0.18 per share.
TransUnion in my opinion is a long-term hold. Over the long run, the economy will grow, demand for credit will grow, and TransUnion is well equipped to capture that growth - read my first article to understand why .
In summary, there are three main drivers of TransUnion's competitiveness. The first is the oligopolistic nature of the global credit bureau, dominated by three major players, and pushing strong margins within that circle. The second thesis revolves around its growth opportunities internationally, consistently pushing double-digit revenue growth, and running the most competitive credit bureau business in India. The third thesis revolves around TransUnion's shift towards (non-credit bureau related) data analytics (think marketing /security /gambling /etc.) - allowing the company to rapidly capture a bigger market while reducing incremental costs.
This is a business that should exist decades from now - through periods of economic growth, through recessions, and through eras of high interest rates. Credit and credit bureaus are necessary businesses, and as long as the company is managed without mindlessly taking on risk, short-term economic fluctuations should not impact the long-term thesis of the investment.
UK Segment Goodwill Impairment:
Although the UK segment lost $495 million on goodwill, this is a non-cash expense and represents a fraction of TransUnion's total revenues. The United Kingdom's total revenues, in 2023, amounted to under $200 million. That's a mere 5% of total revenue. Moreover, TransUnion had never been as competitive in Europe as Equifax (EFX) or Experian (EXPGF) - so the UK should not be the market's big worry. I believe it would be a mistake to discount TransUnion's value based on the UK segment's underperformance. Rather, the market should remain excited by TransUnion's strong revenue growth in other foreign markets, such as India (with 26.4% YOY growth), APAC (12.8% YOY growth), as well as in Latin America and Canada.
Where We Stand Now
Although risks in the macroeconomy still persist, after the recent selloff TransUnion seems more fairly valued, or even undervalued. I've updated the model to reflect the changing economic conditions - mainly reducing short-term revenue growth projection and raising the discount rate from about 7.5% to 9.5%. The model today estimates roughly a $53.59 valuation on TransUnion, which implies roughly a 23% upside.
Of course, it's important to continue following developments in the economy. I'm somewhat bearish about the economy in the medium run (high interest rates combined with record levels of debt cannot end well), I think we are going to see inflation at higher for longer, to help relieve the debt problem. Additionally, I'm optimistic about the long-term future of the world - as long as the world keeps growing, so will the demand for credit, irrespective of shorter-term fluctuation. And I believe this is an opportunity to finally snatch a good business at a reasonable price - and I would be comfortable today buying TRU as a small part of my portfolio.
For further details see:
TransUnion: The Market's Overreaction Offers Opportunity