A Casualty of the Mortgage Mess

03/06/2008 12:00 am EST


Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of the DRIP Investor says credit-verification company Equifax should do well, even though some of its business is tied to housing and mortgages.

Wall Street has beaten up virtually any company that touches the mortgage market. Equifax (NYSE: EFX) is no exception. The company, which provides a variety of credit-verification and human-resources services for corporations, has seen its stock fall more than 25% since peaking last July at more than $46 per share.

Weakness in the credit and mortgage markets impacted results from the company’s mortgage-reporting solutions and credit-marketing services units. Still, Equifax managed to post revenue and earnings growth for 2007 overall, and growth should continue in 2008.

Adding speculative appeal to the stock is the recent disclosure that an activist hedge fund,
ValueAct Capital, has amassed an 8.3% equity stake in the company. The stock may trade sideways in the near term as Wall Street will likely remain weary of companies in the credit and mortgage markets. However, these shares have attractive long-term appreciation potential. The stock offers good value at current prices.

Equifax provides a variety of credit and income-verification services for businesses and consumers. The company expanded its human-resources services with the 2007 acquisition of TALX, a leader in human-resources outsourcing solutions. TALX was the company’s largest acquisition in history and significantly diversifies revenues and broadens the firm’s product portfolio.

While the company’s US Consumer Information Solutions unit was impacted by the downturn in the credit and mortgage markets, international operations posted strong growth for the year. Total revenue on the international side rose 17% (10% growth in local currency) for 2007.

For 2008, Equifax expects revenue growth to be between 9% and 12% and adjusted earnings per share to come in between $2.48 and $2.58, up from $2.32 in 2007. Per-share results should get a bump from the company’s stock-buyback program. The company recently authorized the repurchase of up to an additional $250 million of stock. Since 2004, Equifax has repurchased more than 28 million shares at a cost of more than $1 billion. The company has paid dividends for 95 consecutive years. The current rate is four cents per share per quarter, giving the stock an indicated dividend yield of 0.4%.

Equifax trades at less than 14x the midpoint of the company’s earnings projection for 2008. (It closed just above $34 Wednesday—Editor.) That seems a fairly modest valuation for a firm in the information-services business. Equifax should see business improve with any recovery in the mortgage market. The ValueAct stake should provide some downside support to the stock while providing a potential catalyst for better stock performance. I own these shares and believe the stock will outperform the market over the next 24 months.

(Please note that Equifax offers a direct-purchase plan whereby any investor may buy shares directly.)

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