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Morningstar | Equifax Struggles for Growth in 1Q, Makes Progress on Resolving Breach Settlements

Equifax’s first quarter wasn’t impressive but also wasn’t out of line with our expectations. The company is moving toward resolving some of the uncertainty associated with the 2017 breach. In the quarter, the company recorded a charge of $690 million to account for the amount it expects to pay in state and federal settlements. This is a bit above the estimate built into our valuation, but the difference is not material to our overall valuation. We think moving past this issue is in the best interest of the company, and we will maintain our $130 fair value estimate and wide moat rating.

Growth continues to be hard to come by in the company’s domestic credit bureau operations, with revenue down 3% year over year. While to some extent this may remain a hangover from the breach, the company is now battling industry conditions, as mortgage solutions revenue was down 23% year over year and looks to be the main driver of the weakness in the quarter. Peer TransUnion saw a similar phenomenon in the first quarter. With rates rising, we think mortgage refinancing volume will ultimately settle at a lower level than the industry has generally seen in the postcrisis period, but we also think this will be a one-time issue. One bright spot was a 6% year-over-year increase in financial marketing services, suggesting the company is seeing some traction in at least one area.

International results were somewhat disappointing, with revenue up only 2% excluding currency impacts. The issue appears to be weak lending markets in Australia, which led to a 3% year-over-year drop in Asia-Pacific revenue, excluding currency impacts. While international markets may be somewhat volatile in the near term, we maintain our belief that the most value-creative long-term opportunity for Equifax and its peers lies in replicating their business model in new markets.

The workforce solutions segment saw revenue increase 8% year over year, with 16% growth in employment verification services and a 4% decline in employer services. We’re more interested in the growth in employee verification, as we believe this business has built a moat as wide as the legacy credit bureau operations. Employer services historically has functioned as something of a feeder for employment verification, but its importance in this respect may be declining as the database on the employment verification side has been fleshed out.