The 3 Major Credit Bureaus: Should You Pull Their Reports?

Several years ago, Fair-Isaac was a public company and it was extraordinarily profitable. It also introduced the FICO score.

The FICO score, of course, is the cornerstone of consumer credit scoring.

It then hit me (years later) that perhaps the three major credit bureaus might be public, and that they would likely be fabulously profitable, as well. After all, these credit bureaus charge for just about everything, and permitting creditors to pull credit scores must generate tons of revenue.

As it turns out, though, credit bureaus are profitable but not necessarily growth plays. Still, there may be opportunities worth exploring for the three credit bureau stocks.

Credit Bureaus You Can Invest In: Experian plc (ADR) (EXPGY)

Experian plc (ADR) (EXPGY) is based in Ireland. We know about its credit reporting services, but it also has a marketing platform and a consumer segment that permits consumers to examine and protect their data.

What we also know is that Experian has a solid place in the triumvirate of credit bureaus.

A look at revenue shows that EXPGY has a very steady and reliable business. Revenues for fiscal year 2012, FY13, and FY 14 were $4.73 billion, $4.84 billion, and $4.81 billion, respectively. Expenses were equally consistent, resulting in reliable bottom line results of $367 million, $753 million, and $772 million.

The net income blip in FY12 was due to massive interest expense, the debt from which was subsequently paid down. 2015 results should be out soon.

I also love that EXPGY has very little in the way of capex, so free cash flow runs about $1 billion each year. Yet EXPGY only pays out about 24% of that as a dividend, currently yielding 2.2%. Thus, the company trades at 25x earnings.

Seems high to me for such a small dividend and no growth.

Credit Bureaus You Can Invest In: Equifax Inc. (EFX)

Equifax Inc. (EFX) does trade on the NYSE as opposed to having ADRs. EFX covers the same territory as EXPGY, but has an additional workforce solutions division, which provides employment, income and other verification services, as well as payroll and employment tax management services. That’s a highly competitive area, yet it dovetails nicely with the main function of this credit bureau.

EFX is a bit more of a growth story. Revenues for FY13, FY14, and FY15 were $2.3 billion, $2.44 billion, and $2.66 billion. Net income came in at $352 million, $367 million, and $429 million. That’s some solid bottom-line growth.

It’s not as profitable as Experian, and its cash flow is not as robust — coming in at $600 million but also growing — but it also only pays out 25% of its free cash flow as a 1.1% dividend.

However, EFX is insanely pricey at 35x earnings. I guess the market is so keen about reliable growing businesses that it overpays for them. Still, some of that premium is deserved because it’s part of an oligarchy. Too pricey for me, though.

Credit Bureaus You Can Invest In: TransUnion (TRU)

Finally, we have TransUnion (TRU) which offers pretty much the same services.

It, too, is on a solid growth trajectory. FY13, FY14, and FY15 revenues came in at $1.18 billion, rose 10% to $1.3 billion, and then rose another 16% to $1.51 billion in FY15. However, it has been spending a lot more than its peers, and its operating margins have fallen from 14% in FY13 to 13% in FY15.

What’s killing TRU, however, is its debt load. Its $2.2 billion in debt is generating so much interest that the debt service wipes out its operating income. As a result, net income for the last three years was a loss of $35 million, a loss of $13 million, and a small profit of $6 million.

Cash flow has been inconsistent, and TRU is paying so little in dividends that doesn’t even move the needle on a percentage basis.

I don’t see a clear-cut choice here from a long perspective. TRU has the best growth prospects, but if the market takes down EFX, I would go with that.

As of this writing, Lawrence Meyers has no position in any stock mentioned.

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