They say data is the new oil. One interesting company taking advantage of this new era, which guru Alexander Darwall has a large position in, is Experian PLC(LSE:EXPN, Financial), which operates in the professional business support services subsector. The company is one of the leading credit bureaus in the world and has expanded its operations into data provision and analytics across a wide range of end markets.
The business generates stable profits with Ebit margins above 25% every year since 2012 and return on capital employed coming in close to, and sometimes above, 20% each year since 2012. Revenue momentum has also been strong in recent years, growing steadily from $4.2 billion in 2016 to $5.4 billion in fiscal year 2021.
The company describes itself as:
"Experian is the world’s leading global information services company. During life’s big moments – from buying a home or a car, to sending a child to college, to growing a business by connecting with new customers – we empower consumers and our clients to manage their data with confidence. We help individuals to take financial control and access financial services, businesses to make smarter decisions and thrive, lenders to lend more responsibly, and organisations to prevent identity fraud and crime. We have 17,800 people operating across 45 countries and every day we’re investing in new technologies, talented people and innovation to help all our clients maximise every opportunity."
The company operates a smart business model in credit as lenders provide the data for free and Experian processes it and provides a credit report for a fee. These credit reports are critical for lenders.
Experian’s extensive library of data gives it a competitive advantage. It has the credit history of over 1.3 billion people and 163 million businesses. This scale, along with increasing regulation in data protection, provides a barrier to entry for potential competitors. The credit bureau industry in both the U.S. and the U.K. is dominated by just three companies: Experian, TransUnion (TRU, Financial) and Equifax Inc. (EFX, Financial). Lenders often subscribe to all three providers, so price competition is not strong as the services are essential, i.e., low bargaining power for customers, so Experian see high rates of recurring revenue and customer retention.
Data and tools
In fiscal 2021, 76% of Experian’s revenue came from its business-to-business segment, and 24% came from its consumer services segment. Business-to-business comprises of Data (around 70%) and Decisioning (around 30%). Data, as the name suggests, are the large libraries of information and Decisioning is the name for the analytical software. It’s likely that over time the Decisioning business will drive growth, as if data becomes commoditized, then the way of creating insight is where the true value lies. At Experian, this will be driven by its analytics-on-demand platform Ascend.
Full-year (2021) organic growth in consumer services revenue was 17%, while business-to-business was flat, which is not a bad result given Covid-19’s disruptions to the business world.
Experian typically spends between 8% to 10% of revenue on capital expenditures, with an increasing part of that being spent on technological innovation. Its proprietary algorithms are the key to its high and stable profit margins in the business-to-business segment.
Margins are lower in the consumer services segment, but still healthy. And strong growth last year came after Experian introduced free credit checks where profits are derived from up-selling to paid products and commissions gained from pairing consumers with loans and credit cards. Growth in this division is expected to come from North America and recent entry into Brazil, where consumer credit penetration is much lower than in the developed world. As Brazil’s middle class expands, the penetration should grow too.
Exposure to the credit cycle
Clearly, lending activity falls during a recession, reducing the demand for credit checks. However, Experian has a suite of counter-cyclical services in the areas of bankruptcy and risk management, offering somewhat of a hedge.
It might not be obvious that Experian services non-financial sectors like telecoms and utilities. Also, with a large footprint in the U.S., Experian works with almost two-thirds of American hospitals, which should be a very stable revenue stream. Traditional credit services probably account for less than 30% of Experian’s total revenue now, so the company is less exposed to the credit cycle than one might expect.
Covid-19
In last month’s full-year financial report, CEO Brian Cassin said:
"The COVID-19 pandemic has demonstrated how properly managed data can be used as a significant force for good and has been used by decision-makers to navigate the immediate crisis and to direct resources to where they were most needed. Our people were instrumental in using innovative data science to predict hot zones for the spread of the virus. We stepped up to launch financial education projects aimed at supporting communities impacted by COVID-19. We supported governments, charities and foodbanks to help the most vulnerable during the pandemic, and we provided health and data modelling tools to assist with coordination of national efforts.
These are just some examples of how we have placed the power of our data and innovation in service of society. As we look out to the economic recovery in the months ahead, data will be a critical driver of growth, helping businesses and consumers make better-informed decisions about their futures.
Our financial performance was robust. Total revenue growth was 7% at constant currency, while organically we grew 4%. Consumer Services deserves special mention, delivering 17% underlying growth in the year and reaching 110m members globally. We benefitted from growth in B2B platforms across many territories.Combined with continued expansion in key verticals like health, and growth in counter-cyclical revenue streams such as US mortgage, this enabled us to offset declines in some parts of our business caused by the COVID-19 economic downturn. We benefitted both from our portfolio diversity and from the strategic investments we have made over many years, and we continued to invest in our business in FY21."
I also like the fact that Experian did not use any government furlough schemes. This shows the strength of the balance sheet and the ability of management to get through the crisis by themselves. Also, unlike many other stocks in the industrials industry group, Experian handed shareholders a final dividend last year. Management has also resumed a share buyback program, following a sensible pause during the peak of the pandemic.
Growth
The economic recovery we are seeing now bodes well for credit demand, both from the consumer and the corporate sectors. Consumer spending and capital expenditure is making a comeback and housing markets are strong, all of which supports demand for credit checks and other data analytics.
Financials and valuation
Free cash flow to the firm had dipped slightly between financial years 2016 and 2020, despite growth in operating cash flow over this time. Higher taxes and capex were the reason. But for 2021, FCFF had risen back to nearly $1.2 billion as all the moving parts went in the right direction.
The street sees earnings per share growth of 17% in 2022 and 13% in each of 2023 and 2024.
With a forward price-earnings ratio of 32 and PEG ratio of 2.2, Experian isn’t a value stock. But the stock has a strong Altman-Z score of 6.1 and an OK Piotroski F-Score of 5.0.
But, as we saw when looking at James Anderson’s view on growth stocks, good growth stocks are worth paying up for. The company has very strong competitive advantages, such as intellectual property in algorithms and the tailwinds of the long-term, structural move toward digital finance, which, together with an increased focus on analytics, means this stock can be placed in the quality bucket of your portfolio.
Experian’s first-quarter 2022 trading update will be on July 15.
