EUR 850.00 For Business Accounts Only

Morningstar | Equifax Faces Headwinds in 4Q

Equifax is facing some headwinds as it attempts to return to growth, and these roadblocks are likely to persist into 2019. However, these issues appear to be largely cyclical, and nothing in the quarter alters our view that the wide moat around Equifax’s business will allow the company to ultimately recover from the impact of the 2017 data breach. We will maintain our $130 fair value estimate.

Core domestic credit bureau revenue was down 2% year over year. The decline was largely attributable to the falloff in mortgage activity in the quarter and a 17% decline in the mortgage solutions segment; we have seen this development at peers as well. Barring a downturn in interest rates, we expect refinance activity to be negligible for the foreseeable future. Excluding mortgage-related issues, the domestic credit bureau segment was up 2% year over year, suggesting Equifax still has some work to do to fully return to normalized growth but is heading in the right direction.

Currency headwinds affected international results in the quarter, with revenue down 3% year over year. Excluding currency impacts, growth was modest at 5%, relatively evenly spread across regions. Management pointed to weak macroeconomic conditions in Australia and Argentina as a headwind and expects this issue to persist into 2019. We continue to believe that the industry’s most value-creative long-term opportunity lies in replicating the business model in emerging markets, but near-term deviations in this growth are to be expected.

The workforce solutions segment remains a bright spot for Equifax, posting 12% year-over-year growth, led by the employment verification business. We’re impressed by the company’s ability to extend growth in this area, and the fixed-cost nature of this business allows for further margin expansion.

On the call, management provided more detail on its plans to modernize Equifax's data infrastructure. The company plans to spend $300 million on this effort in 2019 and extend this spending into 2020, although at a lower level. Over the full course of this initiative, Equifax expects to spend a total of $1.25 billion. While this move was the result of the breach and will hamper profitability in the near term, we think this is the wisest course for the company to take. We would also note that Equifax’s peer, TransUnion, went through a similar process a few years ago and saw fairly dramatic margin improvement following its effort. While uncertainties and costs related to the breach persist, we think this could create some longer-term upside.