EUR 850.00 For Business Accounts Only

Morningstar | Equifax’s Pivot Toward Growth in 3Q Is Disappointing

Equifax’s management had expected the company to pivot back toward growth in the second half the year as it started to move past the impact of the data breach last year. However, the pace of growth seen during the third quarter--with revenue increasing just 2% year over year excluding currency effects--was disappointing. Furthermore, management's comments suggest that the progression toward normalized growth will likely take longer than even we had expected, which will likely lead us to lower our fair value estimate to $130 per share from $139. Our wide-moat rating remains intact, though, and we continue to believe that Equifax’s established market position will allow the company to ultimately make a full recovery. We would, however, reiterate our high uncertainty rating on the name, as government investigations and lawsuits related to the breach are ongoing.

From an operating perspective, Equifax's core domestic business was essentially flat year over year, with management pointing to a weak mortgage environment as a headwind. However, it appears on further review that customers have been slower to re-embrace Equifax than had been expected. We remain encouraged by the fact that Equifax has avoided any major client defections during the past year, though, and we continue to believe it is simply a matter of time until the company's operations return to more normalized growth. In our view, the top-line result was the key disappointment during the third quarter. International results saw a bit of a dip in terms of growth, with revenue up just 5% year over year excluding currency effects, as weak macro conditions in Argentina and Australia weighed on results. While we expect greater volatility in international markets, we believe that replicating the credit bureau business model in foreign markets is the most value-creative opportunity for Equifax and its peers in the long run.

Workforce Solutions was the bright spot for Equifax during the third quarter, with 9% year-over-year growth, driven by 11% growth in employment verification, despite the fact that this business is exposed to the mortgage market as well. We are encouraged by the ongoing growth in employment verification, as we believe the moat surrounding this business is as strong as that of the company’s legacy credit bureau operations. As for the consumer segment, it saw a 12% year-over-year decline in revenue, detracting from overall results. In our view, Equifax was never a strong player in this part of the market, and is now operating with a damaged brand. As a result, we think this business will remain pressured and revenue will reset at a significantly lower level, although its partnerships with Credit Karma and LifeLock should provide some ballast longer term.

Given the weaker top-line growth and rising costs, adjusted EBITDA margins fell to 33.0% from 37.4% last year. Management also increased its expected annual security spending related to the breach by $50 million. While the breach will likely rest margins at a lower level, and we don’t expect to see any positive impact for awhile, we would note that there could be long-term benefits from upgrading the company’s data infrastructure. As an example, TransUnion saw a marked multiyear improvement in margins following a somewhat similar effort.