Can the Massive Rebound in Equifax Inc. Stock Continue?

So much for that cyberattack. After a huge peak-to-trough sell-off that looked grossly overdone, Equifax Inc. (NYSE:EFX) stock has snapped back like a rubber band. In fact, EFX stock is up nearly 20% off its mid-September lows.

Can the Massive Rebound in Equifax Inc. Stock Continue?

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Granted, Equifax stock is more than 20% lower than where it traded prior to when the notorious cyberattack became public news. Nonetheless, the quick and fierce rebound in the stock is almost as surprising as the big post-cyberattack sell-off.

With all of that in mind, investors might have a few lingering questions. For example, why has EFX stock bounced back? Will the rally hold through earnings? And, most importantly, is the stock destined to head back to $145?

I think so. Here’s why.

Equifax Stock: Its Business Hardly Affected

EFX stock bulls have been pounding on the table saying that while this attack was damaging to consumers, it isn’t all that damaging to Equifax’s business.

They’re (mostly) right.

Firstly, this isn’t Chipotle Mexican Grill, Inc. (NYSE:CMG). That restaurant chain was left to die by consumers after multiple health scandals left people scared about food safety. Although EFX customers may be concerned about the safety of their information, the credit bureau space isn’t the quick service restaurant space. You can’t just get up and leave.

Why? In the modern economy, consumers need a credit score. It’s not something they can just decide to forego without repercussion. Moreover, there are only three major places in the credit bureau space: Equifax, TransUnion (NYSE:TRU) and Experian plc (ADR) (OTCMKTS:EXPGY).

In this sense, current credit bureau industry dynamics closely reflect an oligopoly. And this oligopoly makes it significantly more likely that EFX will live to fight another day.

Secondly, Equifax doesn’t make a ton of money from its consumers. Barclays notes that 6% of EFX’s revenues are from its direct-to-consumer business, so even a substantial loss of revenue there wouldn’t have a cataclysmic impact on earnings.

Instead, the company makes all of its money in the business-to-business realm. Essentially, EFX has compiled this huge, decades-old consumer database that basically no one else has (expect for TRU and EXPN, of course). Equifax makes most of its money by selling this valuable consumer data to banks, mortgage providers and other businesses.

Overall, the EFX business won’t be damaged much by this cyberattack. Yes, excessive incompetence was exercised by upper-level management. Yes, the data of millions of Americans was compromised. And yes, Washington is getting heated about reform.

But it will take more than a single cyberattack to uproot the old and massive credit industry, which is the backbone of our modern economy.

The most likely outcome of this event is that EFX gets a target on its back, pays some hefty fines and then gets back to “business as usual.” On the financial side, current direct-to-consumer revenues will go down, but those losses may be offset by revenue gains from Equifax’s credit-monitoring service. B2B revenues should remain largely the same.

Equifax’s quarterly earnings are due this week, and they should underscore the fact that a majority of its business is unaltered by the cyberattack. Consequently, as odd as it might seem, earnings could be a nice upward catalyst for the stock.

Bottom Line on EFX Stock

Earnings estimates on Equifax stock have trended down since the cyberattack, but not by much. Overall, I think it’s likely that GAAP earnings come in at least around $5-per-share next year.

The average trailing 5-year price-to-earnings multiple for EFX stock is around 29. Currently, the stock trades well below 29-times trailing earnings due to dour sentiment, but as the data breach storm passes, sentiment will normalize.

By next year, Equifax stock should be back to normal and trade around 29-times earnings. A 29-times multiple on $5 earnings implies a one-year price target of about $145.

I think that is where EFX stock will trend toward over the next 12 months.

As of this writing, Luke Lango was long EFX.

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