October30,2009
Research Analyst:Radharaman Jha, MBA.
Editor: Sweta Killa, M. Fin.
Sr. Ed.: Ian Madsen, CFA; ; 1-800-767-3771, x9417
111 N. Canal Street, Suite 1101●Chicago, IL60606
Equifax Inc. / (EFX - NYSE) / $27.66*Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: 3Q09 Earnings Update
Prev. Ed.: October9, 2009, Initiation of Coverage by One Broker(broker material considered till October7, 2009)
Brokers’ Recommendations: Positive: 71.4% (5 firms); Neutral: 28.6% (2); Negative: 0.0% (0) Prev. Ed.: 5; 2; 0
Brokers’ Target Price: $35.40 (↑$2.80 from the last edition; 5 firms) Brokers’ Avg. Expected Return: 28.0%
*Note: Though dated October 30, 2009, share price and broker material are as of October 28, 2009.
Note: A Flash Update was done on October 21, 2009 (3Q09 Earnings Update; beats expectations)
Note: The tables below (Revenue, Margins, Earnings per Share, and Balance sheet) contain less broker material than the broker material used in the Valuation table. The extra figures in the Valuation table come from reports that did not have accompanying spreadsheet models.
Portfolio Manager Executive Summary
Equifax Inc. (EFX or the Company)is a leading international provider of consumer and business credit information, and maintains the world’slargest consumer credit information database.
71.4% of the brokerage firms covering EFX are positive, and 28.6% are neutral. There are currently no negative ratings on the stock. Out of thefive firms providing target prices, four firms provided valuation methodologies. The average expected return over the current price is 28.0%.
Bullish: Buy or equivalent outlook (5/7 firms): Target pricesare in the range of $35.00-$36.00: These bullish firms believe that the Company is well positioned to outperform,given strong free cash flow characteristics, high degree of operating leverage improving credit market, better portfolio, merger & acquisition activity, and expected to return on positive growth in near future. According to the firms, the Company is well positioned to aggressively tap the emerging market for small business data and analytics solutions. The firms see great opportunity for potential upside for the stock in near future with improvement in lending environment and continued strength of TALX coupled with incremental data from the recently acquired IXI allowing EFX to differentiate the Company’s services and capture market share, while providing stable margin levels on continued cost controls. While topline trends will likely remain challenged given continued consumer de-leveraging, the firms are of the opinion that an attractive opportunity exists for investors seeking a high-quality derivative investment on incremental credit market improvements without the balance sheet risks.
Cautious: Neutral or equivalent outlook (2/7 firms):The firms did not provide a target price. According to these cautious firms, the stock would behave at par with the market and they do not see a near-term economic turnaround. However, the Company would be benefited from the new acquisition of IXI Corporation in longer term. The firms also observe that management’s effort during the economic headwind was commendable and expect the stock to see appreciation as the credit sentimentimproves.
The brokerage firms believe the following additional factors should also be taken into consideration for investing in the stock:
A)EFX operates in the United States, Canada, Costa Rica, the United Kingdom, the Republic of Ireland, Spain, Portugal, Brazil, Argentina, Chile, El Salvador, Honduras, Peru, and Uruguay.
B)EFX is among the three primary providers of consumer credit data and analytics to US financial institutionsand other vertical markets. Its barriers to entry are high and increasingly diverse, offering risk and portfolio management products.
C)EFX provides credit reports on businesses and consumers, helps financial clients manage their consumer debt portfolios, enables consumers to monitor their credit profiles, and offers marketing services, commercial and authentication services.
D)Competition for the commercial solutions products primarily includes Experian and The Dun & Bradstreet Corporation. Competition for consumer information solutions and personal solutions products include Experian Group Limited, or Experian, and TransUnion LLC, or TransUnion.
E)The Company pays a quarterly dividend of $0.04 per share or $0.16 annually, with a dividend yield of 0.58%. According to Zacks Research Digest,the dividend is expected to increase 6.7% in FY09 and decrease 6.3% in FY10.
General Outlook
The brokerage firms expect the potential for a core business to rebound, and believe thatthe Company is making a solid headway with some of its new product initiatives, and that it continues investing in new businesses that can support organic revenue growth in a constrained longer-term consumer credit environment. In addition to a high entry barrier, EFX’s new mortgage technology, cross selling of TALX data and the recentacquisition of IXI, they expect new growth initiatives to provide annual organic growth beyond FY10. On a macro level, the management as well as brokerage firms expect credit volume tostart improving by 2H10. Zacks Research Digest model projects short-term and long-term debt to grow at three-year (2008-2011) CAGRs of 35.8% and (45.0%), respectively. Cash and cash equivalents are likely to increase by93.8% and 82.1% y/y in FY09 and FY10, respectively, but decrease 68.4% in FY11 with a three-year CAGR of 3.7%. EPS is expected todecrease 7.4% in FY09 and increase 6.2% and 13.7% in FY10 and FY11, respectively, with a three-year CAGR of 3.8%.
October28, 2009
Recent Events
On October 21, 2009, EFX announced its 3Q09 earnings results. Highlights are as follows:
- Total revenue was $451.9 million versus $484.1 million in 3Q08.
- GAAP net income was $59.7 million versus $72.3 million in 3Q08.
- GAAP EPS was $0.47 versus $0.56 in 3Q08.
On September 15, 2009, EFX paid a quarterly dividend of $0.04 per share, to shareholders of record as of the close of business on August 25, 2009, as declared by the Board of Directors on August 14, 2009.
On September 15, 2009, EFX announced that the Company and Exchange Solutions, Inc. (ESI) have formed a partnership to deliver joint solutions powered by ESI's innovative technology and Equifax's rich data and analytic capabilities. These new solutions will enablethe Company’s clients to more effectively get engaged in a two-way dialogue with their customers to identify opportunities for attracting a greater share of their customers' business. This new collaboration capability will provide the companies with a powerful new approach to account for origination and cross selling that can better address the needs of the customer.
On August 24, 2009, EFX announced that it has selected Chile for a new software R&D center. Equifax's Chilean center works in collaboration with the Company's U.S. and Indian centers on research and development for software that Equifax uses to analyze financial data and patterns and assist decision-making.
Overview
Based in Atlanta, Georgia, Equifax, Inc. (EFX or the Company) engages in the collection, organization, and management of various types of credit, financial, public record, demographic, and marketing information regarding individuals and businesses. EFX’s products and services include consumer credit information, information database management, marketing information, business credit information, and decisioning and analytical tools. It also enables consumers to manage and protect their financial affairs through a portfolio of products that it sells directly via the Internet and in various hard copy formats. The Company operates in the United States, Canada, Costa Rica, the United Kingdom, Ireland, Spain, Portugal, Brazil, Argentina, Chile, El Salvador, Peru, and Uruguay. Equifax divides its businesses into five operating segments: U.S. Consumer InformationSolutions,International, North America Personal Solutions, North America Commercial Solutions, and TALX.
Brokerage firms have identified the following factors for evaluating the investment merits of EFX:
Key Positive Arguments / Key Negative Arguments- Dominant Position in Credit Reporting Services– EFX is well positioned to deliver continued solid growth with strong free cash flow generated from its core credit reporting services, which are highly leveragable areas.
- International Expansion – Most of the firms expect international markets to serve as an increasingly important growth driver in the coming years as consumer credit usage becomes more prevalent in developing markets, such as Eastern Europe, Latin America, and the Asia Pacific.
- TALX Acquisition - The acquisition of TALX provides EFX a broadened set of proprietary data that will help to differentiate the Company from its credit bureau competitors, support new product development, and provide attractivecross-selling/up-selling opportunities.
- Fraudulent Activity – Given the sensitive nature of the information that EFX compiles, its databaseis a natural target for fraudulent activity. There is no guarantee that determined fraudsters might not obtain access to EFX's information.
- Economic Sensitivity –EFX generates approximately 10% of its revenue from the mortgage industry, exposing the Company to revenue fluctuations from increases and decreases in mortgage application activity stemming from interest rate fluctuations.
- Potential for Heightened Regulatory Oversight —The users of EFX's data could face restrictions while protecting sensitive information, such as, social security numbers.
- Foreign exchange—Although international sales account for approximately 26% of EFX's business, significant moves in foreign exchange rates could create a meaningful headwind to sales growth.
For more information on the Company, please visit
Note: EFX’s Fiscal Year ends on December 31.
July27, 2009
Revenue
According to the Company and Zacks Research Digest, 3Q09 total revenue was $451.9 million (in line with the press release), down 6.7% y/y and0.8% q/q from $484.1 million in 3Q08 and $455.4 million in 2Q09. Changes in foreign exchange rates negatively affected revenues by $12.4 million.
Provided below is a summary of revenue as compiled by Zacks Digest:
Total Revenue ($ in million) / 3Q08A / 2008A / 2Q09A / 3Q09A / 4Q09E / 2009E / 2010E / 2011EZacks Consensus
Total Revenue / $484.1 / $1,935.8 / $455.4 / $451.9 / $445.3 / $1,806.4↓ / $1,872.4↑ / $1,944.7↓
Digest High / $484.1 / $1,936.0 / $455.4 / $451.9 / $448.7 / $1,810.0↓ / $1,916.7↑ / $1,944.7↓
Digest Low / $484.1 / $1,935.7 / $455.4 / $451.9 / $440.3 / $1,800.5↓ / $1,823.1↓ / $1,944.7↓
Y/Y Growth / -1.7% / 5.0% / -9.3% / -6.7% / -0.3% / -6.7%↓ / 3.7%↑ / 3.9%↓
Q/Q Growth / -3.5% / 0.6% / -0.8% / -1.5%
The details of the revenue segments as per Zacks Research Digest are as follows:
U.S. Consumer Information Solutions (USCIS) (44.4% of3Q09 revenue)
U.S. Consumer Information Solutions provides credit reports, analytics, and other services to customers in banking, finance, telecom, retail, utility, media, and other industries. It also includes credit card marketing and direct marketing products/services. 3Q09 segment revenue was $200.7 million, down 9.0% y/y from $220.6 million in 3Q08. Managementindicated thatweakness in the U.S. credit and retail economy affected the 3Q09 segment results, which are partially offset by growth in the Mortgage Solutions business due to increased settlement services and mortgage refinancing activity in FY09.
Within the U.S. Consumer Information Solutions segment, the Online Consumer Information Solutions business posted revenue of $131.4 million,down 13.0% y/y. Mortgage Reporting Solutions postedrevenue of $22.5 million, up 34.7% y/ydue to increased activity associated with growth in demand for its settlement services products and higher volumes of mortgage credit reporting related to increased refinancing activity and incremental revenue from its acquisition of certain assets of a small mortgage credit reporting reseller. Credit Marketing Services (CMS) revenue was $25.7 million, down 14.3% y/y. Direct Marketing Services revenue was $21.1 million, down 7.5% y/y.
EFX continues to integrate TALX data into credit products, and demand is ramping. Additionally, management believes a renewed push by banks to grow deposit share could be an opportunity for the Company. One firm (J.P. Morgan) believes the efforts to reduce credit card limits remain an issue for the Company. For 4Q09, it expects USCIS revenues todecline and follow the seasonal trends.
Another firm (Stifel Nicolaus) expectsthe Company not to spend on marketing in the near future.
International (25.4% of 3Q09 revenue)
International consists of consumer/commercial credit information units in Europe (the U K, Spain, Ireland, andPortugal), credit and marketing information in Latin America (mostly Brazil, Chile, and Argentina),and a consumer credit unit in Canada. 3Q09 segment revenue was $114.9 million, down 13.3% y/y from $132.5 million in 3Q08. Management said lower revenue was primarily due to the negative impact of foreign currency translation and global economic weakness affecting several international country operations of the Company.
Equifax Europe posted revenue of $36.5 million, down 18.7% y/y. Equifax Latin America posted revenue of $52.3 million, down 11.8% y/y. Canada Consumer revenues of $26.1 million were down 7.8% y/y. Management indicated that the European business benefited from higher volumes and new customers for its online services and new collection products in Spain and Portugal.
EFX is working on long-term operating efficiencies, including mail automation, local outsourcing, and dispute handing in Brazil, the U.K., Canada, and Spain. Management expects constant currency International revenue to be down slightly in 4Q09.
One firm (J.P. Morgan) believes that for 4Q09, segment revenues would drop modestly q/q.
Another firm (R W. Baird) has a positive outlook for theLatin American segment of the International business, as it believes continued economic growth and increased penetration of debt products at the consumer level will serve as catalysts in the near term.
Another firm (Stephens) expects this segment to benefit from various growth initiatives and an improving international economy going into FY10.
North American Personal Solutions(8.2% of 3Q09 revenue)
North AmericanPersonal Solutions offers credit reports and monitoring tools to consumers. 3Q09 segment revenue was $37.1 million, down 9.3% y/y from $40.9 million in 3Q08. Direct to consumer, itsbranded subscription service revenue was up 2.0% y/y in 3Q09, primarily driven by higher new sales and higher average revenue per subscription, reflecting additional features in the Equifax offering, as well as a slightly improved customer retention. However, this growth was more than offset by lower transaction sales, as a result of lower levels of new consumer credit activity, and lower corporate data breach revenues.
Management added that demand for the recently launched Debt Wise product is tracking and should be a contributor to topline growth in 2010. Additionally, the Company is working with an outsourcing partner to improve the effectiveness of crossselling initiatives. Management expects 4Q09 revenue to be down slightly on a q/q basis.
The Company said that it is focusing on several initiatives to increase revenue per customer. Management indicated that demand for the recently launched Debt Wise product is tracking and should be a contributor to topline growth in FY10. Additionally, one firm (Raymond James) expects that the Company will be benefited from its stepthat it is working with an outsourcing partner to improve the effectiveness of cross-selling initiatives.
With increasingly recurring revenue driven by subscription-based services and improving consumer credit awareness, one firm (R W. Baird) believes Personal Solutions to remain an important growth driver for the near future. It also believes that the transactional-based revenues will remain under pressure due to consumers focusing on de-leveraging their balance sheets, which likely reduce aggregate interest in one-time credit report/score inquiries by individuals, especially as the competitive environment for consumer mind share is a challenging one given massive marketing initiatives undertaken by competitor Experian over the last couple of years.
North American Commercial Solutions(3.6% of 3Q09 revenue)
Commercial Solutions provides business (commercial) credit information and analytics in the U.S. and Canada.3Q09 segment revenue was $16.1 million, down 3.6% y/y from $16.7 million in 3Q08. The division was negatively affected byunfavorable impact of changes in the U.S., besides the - Canadian foreign exchange rate of $0.4 million, or 2.0% y/y.
Management expects 4Q09 segment revenue to be higher versus 3Q09.
TALX(18.4% of 3Q09 revenue)
TALX gives Equifax a foothold in the high-growth employment verification and human resources information services market. TALX consists of three operating segments: The Work Number Services, Tax Management Services, and Talent Management Services. The Work Number Services provides employment and income verification. Tax Management Services provides unemployment insurance claims processing as well as tax credit and incentive assistance. Finally, Talent Management Services provides testing and assessment services, allowing organizations to more fully automate the hiring process. 3Q09 segment revenue was $83.1 million, up 13.2% y/y from $73.4 million in 3Q08.
The Work Number (TWN) revenue was $37.0 million, up 13.5% y/yin 3Q09. During 3Q09, the Company added 52 new TWN data contributors and more than 3.2 million records in its database.
Tax and Talent Management revenues were $46.1 million, up 13.0% y/y. The strong performance in this group was primarily attributed to increased unemployment compensation claims activity due to the high levels of unemployment in the U.S.
One firm (Stephens) continues to expect TALX to outperform in the coming quarters on cross-sell strength and very strong and growing pipeline.
For 4Q09, management expects TALX revenue to be slightly up sequentially and emphasize on expanding the use of The Work Number through cross-selling and new product development. Longer term, one firm (R W. Baird) believes TALX will be a source of advantage for EFX, and expects this highly differentiated product to help win large customers away from EFX’s competitors.
One firm (J.P. Morgan) believes that TALX could see a double- digit revenue growth in 4Q09, given volume gains at The Work Number and cross-selling initiatives.
Most of the firms expectthe Company to comfortably report 4Q09 higher segment revenue sequentially.
Provided below is a summary of revenue segments as compiled by Zacks Digest:
Revenue Segments ($ in million) / 3Q08A / 2008A / 2Q09A / 3Q09A / 4Q09E / 2009E / 2010E / 2011EU.S. Consumer Information Solutions / $220.6 / $890.8 / $211.0 / $200.7 / $193.2 / $814.9↓ / $831.9↓ / $852.0↑
International / $132.5 / $505.7 / $105.2 / $114.9 / $114.0 / $434.9↑ / $464.1↑ / $500.6↑
North America Personal Solutions / $40.9 / $162.6 / $37.5 / $37.1 / $35.2 / $148.2↓ / $151.8↓ / $148.1↓
North America Commercial Solutions / $16.7 / $71.5 / $15.7 / $16.1 / $18.2 / $65.8 / $68.2↓ / $78.0↑
TALX / $73.4 / $305.1 / $86.0 / $83.1 / $83.7 / $340.7↓ / $358.1↓ / $366.1↓
Provided below is a graphical representation of segmental revenue: