As-reported metrics make Equifax look far less profitable than reality
As data becomes more and more essential to the world, the firms that hold it will become more powerful. Consumer credit rating companies are some of those companies that have a ton of data that everyone wants access to.
Today, we are going to take a closer look at Equifax Inc. (EFX), one of the leading consumer credit rating companies, through a Uniform Accounting lens to get a better idea to see how it’s performing in this age of data.
Also below, the company’s Uniform Accounting Performance and Valuation Tearsheet.
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Data is what makes the modern economy go round. It’s essential to power so much of what we do. For a civilization built on leverage and debt to power further opportunities, underwriting data is gold.
One group of companies that has been at the heart of understanding the value and power of data is the consumer credit rating companies, including TransUnion (TRU), Experian (EXPN), and Equifax.
These firms understand that if they can paint a broader picture of our lives, they can better understand underwriting. Everyone will want that data, which should help them see strong profitability.
By tracking the credit history of borrowers, these companies can generate reports and credit scores that help determine credit risk. The reports are typically then sold to lenders as a risk profile of consumers looking to take out loans.
However, as-reported metrics show that desire to acquire all that data hasn’t really benefited Equifax.
Its return on assets (“ROA”) appear to have consistently been weak, sitting below 10% since 2008. But in 2017, Equifax suffered a major data breach, putting the personal information of close to half the US population at risk.
As-reported metrics make it seem Equifax is just starting to now recover from that data breach. As-reported return on assets (“ROA”) fell from 7% in 2017 to 4% levels in 2018-2019, before recovering back to 7% in 2021.
While Equifax’s profitability has seen improvement, this low level is disappointing, given the power of the data it holds.
However, if we look at Uniform metrics, we can see that Equifax has actually been massively profitable this whole time.
While Uniform metrics show us Equifax did still take a hit following the data breach, dropping from 66% in 2017 to 42% in 2019, it never actually fell to below cost-of-capital levels. Since then, its ROA has returned to 66% levels in 2021, showing us customers still see the value in all the data the firm holds.
With Uniform Accounting, we can see that being a data warehouse has been incredibly profitable for Equifax.
As long as data continues to help run the economy, Equifax will play an essential role in it. Its data breach was a bump in the road, but the firm soon recovered and is once again seeing the strong profitability it saw before.
Yet the distortions of GAAP reporting make the firm seem significantly less profitable than in reality, hiding the true power Equifax holds through its data.
Investors relying on GAAP metrics to make financial decisions like this are constantly missing out on the true performance of companies across the market, making theme-based investing impossible. To learn more about how to gain access to the real numbers for almost 25,000 companies around the world, click here to read about our Uniform Accounting database.
SUMMARY and Equifax Inc. Tearsheet
As the Uniform Accounting tearsheet for Equifax Inc. (EFX:USA) highlights, the Uniform P/E trades at 28.5x, which is above the global corporate average of 20.6x, but below its own historical P/E of 30.4x.
High P/Es require high EPS growth to sustain them. In the case of Equifax, the company has recently shown a 69% growth in Uniform EPS.
Wall Street analysts provide stock and valuation recommendations that in general provide very poor guidance or insight. However, Wall Street analysts’ near-term earnings forecasts tend to have relevant information.
We take Wall Street forecasts for GAAP earnings and convert them to Uniform earnings forecasts. When we do this, Equifax’s Wall Street analyst-driven forecast is a 9% decline and a 15% EPS growth in 2022 and 2023, respectively.
Based on the current stock market valuations, we can use earnings growth valuation metrics to back into the required growth rate to justify Equifax’s $195 stock price. These are often referred to as market embedded expectations.
The company is currently being valued as if Uniform earnings were to grow by 7% annually over the next three years. What Wall Street analysts expect for Equifax’s earnings growth is below what the current stock market valuation requires in 2022, but above its requirement in 2023.
Furthermore, the company’s earning power in 2021 is 11x the long-run corporate average. Additionally, cash flows and cash on hand are slightly above its total obligations—including debt maturities, capex maintenance, and dividends. Also, intrinsic credit risk is 150bps above the risk free rate.
Overall, this signals an average credit and dividend risk.
Lastly, Equifax’s Uniform earnings growth is below its peer averages, but the company is trading above average peer valuations.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research