Post-Hack, Is Equifax (EFX) Stock Doomed To Fail Or Destined To Rebound?

Hollywood should be paying attention. The Equifax Inc. (NYSE:EFX) saga that has unfolded over the past several weeks and driven EFX stock to multi-year lows has all the makings of a really good movie.

Post-Hack, Is Equifax (EFX) Stock Doomed To Fail Or Destined To Rebound?

There’s obviously the headline data breach that affected an unprecedented 143 million U.S. consumers. Then there is the footnote that the hack also included records on 400,000 people in the U.K. There’s the fact that Equifax was hacked as much as five months prior to disclosing it to the public.

And then there are all the big position resignations, the Internet finding out that Equifax hired a music major as their chief security officer, and, of course, the insider trading.

Maybe people “in the industry” are “taking meetings” on the Paramount lot or at agents’ office, planning the summer blockbuster somewhere down the road.

But, I won’t bet on that. But I will bet on this: a few years down the road, EFX stock will be much, much higher than where it is today.

Call me crazy, but I think this steep sell-off in EFX stock is actually a buying opportunity. Near-term headline risks are creating a capitulation situation that undervalues the long-term earnings growth potential of this high-moat business.

The Sell Off in Equifax Stock is Overdone

To understand why this sell-off in EFX stock is overdone, one must first understand the Equifax business.

Equifax is one of three major players in the credit bureau space alongside TransUnion (NYSE:TRU) and Experian plc (LON:EXPN). Current industry dynamics pretty much reflect an oligopoly that is the result of massive industry consolidation which began in the 1970s.

This oligopoly ensures that EFX will live to fight another day. At the core of these businesses are huge databases. These huge databases comprise all the necessary and valuable information about a consumer (income, employment, assets, credit, etc.).

It takes a while to get all the data, especially considering much of it is decades old. At this point, it’s nearly impossible to replicate this database. In this sense, EFX’s big database of consumer information is a massive moat for this business.

Consequently, it’s almost a sure thing that Equifax will be around and doing a good amount of business in five years, or a decade and even beyond.

But how much business? How much will this data breach affect financial operations?

In the near-term, it’s still too early to tell. This is a developing story, and how deeply EFX’s revenue and earnings will be affected next year is still a wild card.

In the long-term, though, Equifax won’t be hurt that much. EFX only gets about 10% of its revenues from consumers. Undoubtedly, as public trust in EFX erodes, this revenue stream will get axed. But the other roughly 90% of EFX’s revenues are mostly from commercial and government entities. As one of the three oligopoly players, it is unlikely that Equifax will see significant declines in these revenue streams.


In this sense, the data breach is just a headline risk that will hurt near-term earnings but not materially affect long-term earnings growth.

Most analysts agree with this sentiment. That is why most of them are sticking with their bullish ratings on EFX stock.

So, is it time to buy the dip?

Bottom Line on EFX Stock

This stock isn’t for the faint of heart. In fact, it’s only for those with a healthy appetite for risk.

But it pays to remember that markets often overreact to headline risks without fully understanding the long-term growth impact.

Here is is a high-moat, stable-growth business in a very stable marketplace. That’s enabled Equifax to grow earnings per share at a 15%-plus compounded annual growth rate over the past five years. Growth over the next five will be slower. For one thing, near-term headline risks will cause near-term earnings growth to be well short of that 15% rate. As well, growth rates will naturally erode as the business continues to scale.

But even if earnings growth over the next five years is just 10%, that is still pretty good for a stock which is trading at its lowest EBITDA multiple since 2014.

In short: this data breach headline storm will pass. When it does, EFX stock will rise.

As of this writing, Luke Lango was long EFX.

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