A Humbling Moment: Equifax

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Stock: Equifax (ticker EFX) 

A look at Equifax pre-crisis

“This is the most humbling moment in our 118-year history.

“We apologize to everyone affected.”

Chief Executive Officer Richard Smith wrote in an op-ed posted to USA Today’s website Sept. 12. (Bloomberg)

Equifax has been mired with ongoing troubles since its data breach that could have potentially exposed 143 million sensitive personal information. This sent Equifax’s shares down 34.85% as of Friday since the crisis hit.

To add, Equifax’s chief information officer and chief security officer are now leaving the company, and a group of attorneys general has asked for the company to stop selling its credit monitoring services.

Equifax also revealed on Friday that as many as 400,000 United Kingdom customers may also have been hacked (Bloomberg).

Morgan Stanley also provided a possibly much more dire outlook on Equifax having indicated a further 50% decline in the already wrecked share price.

All of these findings are turning worse and worse for Equifax as incrementally this is a direct assault on the company’s capability of taking good care of its clients’ personal information.

Equifax prior to recent blunder
Looking back, Equifax delivered healthy revenue and profit growth at rates 10% and 37%, respectively, as of its recent six months operations.

Equifax
According to filings, Equifax was originally incorporated under the laws of the State of Georgia in 1913, and its predecessor company dates back to 1899.

Equifax is a leading global provider of information solutions and human resources business process outsourcing services for businesses, governments and consumers.

The company has a large and diversified group of clients, including financial institutions, corporations, governments and individuals.

Equifax’s products and services are based on comprehensive databases of consumer and business information derived from numerous sources including credit, financial assets, telecommunications and utility payments, employment, income, demographic and marketing data.

Further, Equifax helps consumers understand, manage and protect their personal information and make more informed financial decisions.

The company also provides information, technology and services to support debt collections and recovery management. Additionally, Equifax is a leading provider of payroll-related and human resource management business process outsourcing services in the United States of America.

In 2016, Equifax generated 73% of its revenue in the United States, and the rest in other countries.

Equifax has four operating segments:

USIS
U.S. Information Solutions (USIS) — provides consumer and commercial information solutions to businesses in the U.S. including online information, decisioning technology solutions, fraud and identity management services, portfolio management services, mortgage reporting and financial marketing services.

In the first half, USIS grew 6.5% to $642 million or 38% of Equifax’s gross revenue and delivered an operating margin of 43.5% compared to 42.6% a year earlier.

International
International —which includes our Canada, Europe, Asia Pacific and Latin America business units, provides products and services similar to those available in the USIS operating segment but with variations by geographic region. In Europe, Asia and Latin America, we also provide information, technology and services to support debt collections and recovery management.

In the first half, International revenue grew 18.8% to $447.7 million (27% of sales) and operating margin of 17% compared to 14.1% a year earlier.

Equifax stated that it recorded better profitability in its international operations brought by reduction in costs related to its $1.9 billion acquisition of an Australian credit information company Veda Group, a gain on the sale of an asset, as well as a decrease in people costs.

Workforce Solutions
Workforce Solutions — provides services enabling clients to verify income and employment (Verification Services) as well as to outsource and automate the performance of certain payroll-related and human resources management business processes, including unemployment cost management, tax credits and incentives and I-9 management services and services to allow employers to ensure compliance with the Affordable Care Act (Employer Services).

In the first half, Workforce revenue grew 10.4% to $394.5 million (23% of revenue) and operating margin 45.2% compared to 43.9% a year earlier.

Global Consumer Solutions
Global Consumer Solutions — provides products to consumers in the United States, Canada, and the U.K., enabling them to understand and monitor their credit and monitor and help protect their identity. We also sell consumer and credit information to resellers who combine our information with other information to provide direct to consumer monitoring, reports and scores.

Revenue in the Global Consumer Solutions rose 1.1% to $204.8 million (12% of sales) and registered a margin of 28.4% vs. 26.1% a year earlier.
Sales and profits

Sales and profits
In the past three years, Equifax registered 10.93% revenue growth average, 11.6% profit growth average, and profit margin average of 15.6% (Morningstar).

Cash, debt and book value (equity)
As of June, Equifax had $404 million in cash and cash equivalents and $2.83 billion in debt with debt-equity ratio 0.94 times compared to 1.16 times a year earlier. Overall debt fell by $115 million while equity rose by $479 million to $3.02 billion year over year.

77% of Equifax’s $7.06 billion assets were goodwill and intangibles.

Cash flow
In the first half, Equifax’s cash flow from operations climbed 17.9% year over year to $329 million brought mostly by higher profits in the period.

Capital expenditures were $100 million leaving the company with $229 million in free cash flow compared to $197 million a year earlier.

The company raised $139 million in financing activities net repayments and borrowings while it provided 41% of its free cash flow in dividends.

The cash flow summary
In the past three years, Equifax allocated $406 million in capital expenditures, raised $1.12 billion, generated $1.75 billion in free cash flow, and provided $915 million in dividends and share repurchases at an average payout ratio of 53.8%.

Conclusion
Excluding recent events, Equifax seemed to be an excellent steadily growing profitable company. After a significant amount of share price drop and still trading at 3.7 times book value, Equifax still does look like less of a bargain.

Further, the company has a leveraged balance sheet accompanied by more than three-quarters in goodwill and intangibles having kept a somewhat conservative dividend payouts to its shareholders.

Average analysts estimates indicated an overweight recommendation with a target price of $141.36 a share vs. $92.80 at the time of writing. Applying four-year PB multiple average and a 20% margin indicated a per share figure of $80.

In summary, Equifax would be a very very cautious buy at $120 a share target price.

Disclosure: I do not have shares in any of the companies mentioned.

One thought on “A Humbling Moment: Equifax

  1. Pingback: COL Financial, Time to WAKE UP! | Perennial investing by Mark Y.

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