EUR 850.00 For Business Accounts Only

Morningstar | Equifax’s Wide Moat Has Not Been Breached

Limited competition in its core credit bureau business allows Equifax to enjoy strong margins, but the maturity of its core business restricts growth, so the company has been expanding through acquisition into new geographies and new lines.The impact of the recent data breach will drive near-term results, but we believe Equifax's entrenched position will allow it to weather the storm. We see the impact from the breach falling along some basic lines. First, the company is likely to pay material fines and lawsuit damages, but historically these have been manageable for affected companies. Second, we would expect to see sales slow a bit in the near term, given the distraction and the blow to the company's reputation, and results so far suggest this might be a protracted process. Finally, security costs will increase on an ongoing basis; Equifax expects to spend $300 million in improving its data infrastructure in 2019, and for spending to continue at a lower level in 2020. Altogether, we think a realistic view of this situation suggests a meaningful but not dramatic impact on the company's long-term value. Ultimately, we expect the company's margins to settle at a modestly lower level than the company generated before the breach.Equifax's biggest move in recent years has been the buildout of its workforce solutions segment, which now accounts for more than 20% of revenue. We think the employment verification part of this segment is the moatiest. Given the need to persuade businesses to provide this sensitive information, we believe the business benefits from a first-mover advantage that will allow it to establish strong barriers to entry. Growth in this segment has been fairly strong recently, and margins have improved significantly as the business has scaled, trends we expect to start to moderate.We think the most value-creative expansion opportunity lies in emerging markets, where growing middle-class populations should allow Equifax to export its business model. But opportunities are somewhat limited, given the set of conditions necessary to establish operations, and we think the near-term opportunities are in smaller countries that won't move the needle.