The Equifax, Inc. (NYSE:EFX) data breach has caused extreme consternation among the public, and by extension, the stockholders themselves.
EFX stock has enjoyed high growth and relatively frequent dividend increases in the past. But now, Equifax stock faces a crisis after a data breach involving 143 million Americans.
Despite waiving fees on security services for which the company normally charges, lawsuits are demanding answers and compensation. However, consumer data functions as only one segment of its business. With the involvement in other business lines, EFX stock is poised to recover once the crisis abates.
Sure, financial service companies like Equifax, Experian plc (ADR) (OTCMKTS:EXPGY), Moody’s Corporation (NYSE:MCO) and TransUnion (NYSE:TRU) all require high levels of trust in order to ever connect with businesses and consumers. But the data breach is not the end of the world for EFX stock.
Equifax, Inc. Weakness is Overdone
Admittedly, investors are abandoning EFX stock in large numbers. Equifax has fallen about 33% since the Sept. 7 announcement of the data breach. The Chief Information and Chief Security Officers resigned amid the chaos. Soon after, the company announced that another data breach occurred earlier in 2017.
In addition, the Department of Justice (DOJ) opened an investigation on three Equifax executives accused of insider trading. Whether another issue emerges or how far its legal troubles will extend is unknown.
However, when the crisis abates, investors should consider these three major factors:
First, Equifax derives most of its revenue from sources besides consumer information. Of its $3.14 billion in revenue for fiscal 2016, it’s U.S. Information Solutions division accounted for $1.24 billion, or 36%. Equifax derives the remainder of its revenue from international operations, workforce solutions, and global consumer solutions, all of which are unaffected by the data breach.
Secondly, these lesser-known business lines offer a further competitive advantage to EFX. Its workforce solutions division. The division began as a separate company called TALX. Equifax acquired this company in 2007 and integrated TALX into its ecosystem as Equifax Workforce Solutions. This segment includes an employment verification division, which compiles salary and employment information from large employers. It is critical to company hiring and credit verification processes.
Equifax also participates in the emerging markets segment. Many countries classified as “developing” have seen both population growth and growth of their middle class. Hence, credit rating services comparable to those in the U.S. are needed in these parts of the world as well.
Further, Equifax expanded into business credit with its acquisition of Veda. Veda gives EFX a foothold in Australia and New Zealand. Additionally, it replicates Equifax’s credit checks for the commercial sector.
Thirdly, financial metrics (at least metrics reported before news of the data breach) appear healthy. With a price to earnings (PE) ratio at about 20, the stock’s ratio remains near S&P 500 averages. These improved metrics make the stock more attractive to buyers. Also, revenue growth stands at about 10.7%, and net income growth has been at nearly 16% over the last five years. Further, dividends increased every year since 2010. The dividend, only 16 cents in 2009, now stands at $1.56 per share for 2017, an approximate 1.6% yield. While most analysts expect a negative impact from the data breach, other segments will still produce profits.
EFX is Still a Buy
Due to the competitive advantage offered by its other segments and a growing need for data for international customers, EFX stock is poised to recover once its data breach crisis abates.
While the data breach damaged its reputation and its stock valuation in a very short time, Equifax’s other lines of business are still well-positioned to generate revenues and profits. Those lines place Equifax at the forefront of employment verification and credit score monitoring of new, international customers.
With its divisions outside of the U.S. credit sector and its commitment to restore its reputation, EFX stock will again be a compelling investment.
As of this writing, Will Healy did not own a position in any of the stocks mentioned here.