Was Equifax Inc. (NYSE:EFX) ever on your radar before a few weeks ago? It wasn’t on mine until the credit reporting agency compromised more than 145 million Americans’ sensitive data. As a result of such an egregious error, EFX stock has tumbled more than 23%.
It’s no secret about what happened, but the way it was handled was disgusting.
So, what exactly went down? Equifax first became aware of the hacking on July 29. But it wasn’t until Sept. 7 that the company told the public. Management would later find out that the attack had been ongoing for months. It took EFX more than 140 days to find this out, while most companies take an average of 100 days to discover such an attack.
While not yet publicly known, three executives took part in unscheduled stock sales. Scheduled stock sales are fine amidst a crisis. The whole world — or at least the investors willing to look — can see these sales in plain sight. However, three days after discovering the hacking, these three executives made sales.
One of these insiders was CFO John Gamble. The company has since come out and said the insiders didn’t know about the breach. From an investor’s point of view, how can we believe the CFO was unaware of the largest hacking in American history three days after it was found? And then he and two others randomly partake in an unscheduled stock sale?
Yeah, okay. Either the company is lying and this guy needs to go — like CEO Richard Smith — or it’s one of the most incompetent C-suites I’ve ever seen. In either case, whether EFX was fraudulent or stupid, it doesn’t benefit investors.
Then Equifax had the nerve to say consumers could sign up for its free credit-monitoring services. But the fine print? If you sign up, Equifax wants you to know that it didn’t screw you already by losing your data and that you can’t take part in a class action lawsuit.
What?
Attorney General Eric Schneiderman called this “unacceptable and unenforceable.” EFX has since altered the language in the agreement, but how many times can they screw up the same thing?
Now there’s testimony in front of Congress. As one pundit put it, it’s “like guards at Fort Knox forgetting to lock the doors and not noticing that thieves are looting the vaults.”
The Board
Where there’s smoke, there’s fire. EFX board member Mark Templeton is the founder and former CEO of Citrix Systems, Inc. (NASDAQ:CTXS). He ran that company for more than 14 years, yet he allowed this kind of nonsense to take place?
And how about Susan Maudlin? While many IT professionals admittedly have diverse educational backgrounds, Equifax Chief Security Officer Mauldin’s music degree does not shed positive light on the situation.
Letting these waves of incompetence go by, let’s not forget how long it took for the board to fire Smith or, rather, let him retire. The stock did well under his reign, climbing 270% before the hacking announcement. This crushes the 95% return by the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) over the same period.
But as executive chairman and CEO, he let too much slide leading up to the breach and made too many mistakes following it. In fact, there were many prior warnings.
First, he should have had a better security team in place. Second, there’s no reason it should have taken some 40 days to make the news public. Third, no insider sales should have taken place.
If we play the “he didn’t know card,” there’s no reason Smith should not have made the CFO aware of the hacking to prevent this very situation and figure out the financial implications.
Put simply, the whole operation was way too lax, and that falls on the CEO’s shoulders.
So What About EFX Stock?
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Putting aside the failures of the board and C-suite, what do we do with the stock? Analysts still expect earnings to grow 8.3% this year and 4.2% next year. Sales are forecast to grow 7.4% and 5.1% in 2017 and 2018, respectively.
One would assume one-time charges could weigh on the bottom line, but nothing definitive has come to light as of yet, despite plenty of investigations and lawsuits launching.
In any regard, this isn’t a company for me. When EFX stock dropped to $90, that was the time for investors to buy. EFX stock has popped up 22% since then.
Almost out of protest for Equifax’s failures and lack of commonsense PR, I refuse to invest in EFX stock.
For those that can look past those issues, though, wait patiently for EFX stock to pull back to $90. If it gets there again, or close to it, use that level as your stop loss. A close below $90 could mark significantly more downside.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
