Equifax: Some Thoughts Heading Into 2023 (NYSE:EFX)

In the summer of 2021, I concluded that shares of Equifax (NYSE:EFX) might have been re-rated a bit too much. The secular growth player was sitting on a huge, growing and valuable database, having survived the 2017 data breach well.

A Recap

Equifax is a huge data machine which includes consumer credit, employment, wealth management, demographic, automotive and insurance applications. The idea behind the company and the business model is to sell this data to its customers which in turn use it to make informed decisions. In fact, the company held data on more than 800 million consumers and 100 million businesses at the time, holding even more accounts today.

The idea was that the company has access to all this information itself as well, creating a potential other lucrative revenue stream if it can monetize this valuable asset in a better way in the future.

Organic growth, and occasional dealmaking, made that the company had doubled sales to $3.3 billion in the decade leading up to 2017, generating very fat margins of around 25% in the meantime. With earnings power reported at $4 per share in 2017 (ahead of the data breach), investors were aggressively pricing in the positioning of the business at around 37 times earnings.

Shares fell to $95 overnight following the data breach which reduced the earnings multiple in a huge way, in part because earnings power was set to increase to $5-6 per share that year. The breach was quite scary, with data on nearly half of the US population being obtained, including potential ID theft, access to social security numbers, license numbers and addresses being comprised. The reaction to this event was who fully inadequate, with executives trying to hide the breach and even selling stock ahead of the public announcement.

Since 2017 shares had recovered from levels below the $100 mark to $140 ahead of the pandemic, as the company reached a $700 million settlement related to the data breach. Shares kept rising, trading as high as $260 in August 2021.

Enthusiasm was driven by the fact that 2020 sales rose to $4.1 billion as earnings improved to $7 per share, as the company announced a $640 million deal to acquire Kount, adding AI-driven fraud prevention capabilities to the line-up of capabilities. Through the summer of 2021, it was evident that the company was on track to generate $4.8 billion in sales in 2021, with earnings seen around a midpoint of $7.35 per share. Amidst a 2 times leverage ratio (with net debt posted at $3.4 billion) expectations were very high as earnings multiples expanded to 35 times earnings.

Given the increased operating momentum, Equifax announced a huge deal to acquire Appriss in a $1.825 billion deal, as the $150 million sales contribution came at an effective 10 times multiple adjusted for tax synergies. This was really a bolt-on deal given a $35 billion enterprise valuation of Equifax at the time.

Amidst all of this, I feared the competitive threat from fintechs as well as a very steep valuation, although I was appreciative of the long term positioning and performance.

Re-Rating In A Volatile Environment

Trading at $260 in August 2021, shares rallied to the $300 mark late in 2021, before selling off rather violently to $150 in October of last year, after which a spectacular recovery have sent shares higher to $222 at this point in time.

In February 2022, Equifax announced its 2021 results as revenues surpassed the $4.9 billion mark, higher than expected in the summer of 2021. The company posted GAAP earnings of $6 per share, with adjusted earnings coming in at $7.64 per share, with most of that difference relating to amortization of intangible assets, something which I am happy to adjust for.

Long term debt rose to $5.1 billion following the Appriss deal, a bit high given a $1.7 billion EBITDA number, translating into a 3 times leverage ratio. Through the year the workforce solution business segment has become the largest, responsible for $2.0 billion in sales, complemented by a $1.8 billion US information solution business and a more than $1.1 billion international segment.

The company guided for modest growth in 2022, seeing sales at a midpoint of $5.3 billion and adjusted earnings at a midpoint of $8.65 per share. As it turned out, 2022 has been a bit of a challenging year amidst a strong dollar, as well as softer revenues related to the mortgage market. With these trends, and a softer economic performance, really hurting the business, the company cut the full year sales guidance to $5.10 billion in revenues amidst the third quarter earnings release. Earnings are now seen at just $7.54 per share, down a few pennies on the year before, missing the initial guidance by a dollar. In the meantime, net debt rose to $5.6 billion, increasing leverage ratios a bit to 3 times.

With shares now trading at $222, the 123 million shares represent a more than $27 billion equity valuation, or nearly $33 billion enterprise valuation. The price action made that earnings multiples have fallen from 35 times in the summer to 30 times, but this came as shares traded at just 20 times earnings at $150 in October. Towards the end of the year, the company announced a $583 million deal to acquire Boa Vista Servicos in Brazil, marking a huge 89% premium for the publicly-traded business, equal to 11 times EBITDA. Given the deal tag, the price is equal to 2-3% of the own valuation of Equifax, as 2022 has been a tough year of course.

What Now?

Truth be told, the shares have fallen a bit from $260 to $222 over the past one and a half years, yet the issue is that no growth is seen in 2022 and that leverage is only increasing amidst bolt-on dealmaking which have not added to the results, or at least sales or earnings here.

After a huge 50% rally in just a few months, I feel no temptation to acquire shares here, certainly not as a 30 times earnings multiple feels a bit steep. That being said, a 20 times multiple seems like a decent entry point, although I do not quickly expect a pullback to the $150 mark soon.