Knowledge Is Power
10/05/2009 1:30 pm EST
James Stack, president of Stack Financial Management and InvesTech Research, finds a credit-reporting company whose depth of data gives it lots of opportunities to grow revenue and profit.
Equifax (NYSE: EFX) [profits from] the power of information and is most commonly known as a credit reporting agency. The “credit score” your banker looks at when you apply for a loan is derived from information supplied by Equifax and its competitors.
Historically, this has been the bread and butter of the company, accounting for a large chunk of the firm’s revenue (about 46% in 2008). Nonetheless, credit statistics are just the tip of Equifax’s information iceberg.
The firm [also] maintains an extensive database of income, employment, and wealth data. Even more amazing than the breadth of the company’s data is the depth, with records available on a few hundred million individuals.
The robustness of its database uniquely positions Equifax to solve evolving customer problems. By integrating the standard credit report details (payment history, debt levels, etc.) with its large database of employment history, wage information, and wealth data, management is now targeting markets such as:
- Providing employment information and knowledge to human resource departments, government agencies, collections firms, and mortgage companies. Known as TALX, this segment accounts for 19% of revenues, up from 8% in the second quarter of 2007 thanks to 56% annualized growth.
- Mortgage settlement services. By combining its information database with a platform of appraisers and title companies, Equifax’s bundled settlement program has been proven to reduce mortgage closing times by 33%. This segment is on track to grow from zero to $200 million in annual revenues (10% of total) in just over three years.
- Bank deposit gathering. By leveraging its network of banking contacts, Equifax is now providing data to help banks gather key deposit relationships–a priority for banks in the post-2008 financial meltdown. Although this product is still being developed, it’s a great example of the flexibility and depth of the Equifax data library.
Equifax’s business model is also extremely scalable, which provides high returns and competitive barriers to other firms entering the marketplace. Equifax’s data distribution method is transaction-based–clients are charged on the number of data queries they perform. Once a database is built, each additional “transaction” adds profit directly to the bottom line.
By leveraging product scalability, Equifax has historically provided an average return on equity of 37% during the last ten years. Scalability also affords management a wide competitive moat as the logistics and costs of recreating the database components already owned by Equifax are almost insurmountable.
At a [recent price below $28,] shares are well below mean when compared to the revenue, cash flow, and earnings power of the company. The price/cash flow for Equifax is just off its ten-year low, with significant upside potential.
All in all, when we consider the company’s unmatched information database in combination with a valuation not seen in over ten years, we are very excited about the long-term potential of Equifax.