Dun & Bradstreet Holdings (NYSE:DNB) just went public in a classic “carve-out” by a group of private equity funds and investors. Public owners of DNB stock now own about 21.3% of the underlying company. Management essentially “carved out” a portion of the company for the public.
Dun & Bradstreet raised $1.7 billion at $22 per share from public shareholders, plus another $400 million from the original private equity funds. Since DNB stock is now higher at $26, its market value is $10.7 billion.
But of the 423 million shares outstanding, only 90.1 million of those shares are in the hands of the public. Therefore, the public float is worth just $2.3 billion.
As I said, management and the private equity funds essentially “carved out” a minority portion of their equity pie for the public. Therefore, the private equity funds still call the shots, since they own almost 80% of the underlying company.
However, one thing becomes very clear in reading the final prospectus for DNB stock. Dun & Bradstreet is a very profitable business.
Dun & Bradstreet’s Impressive Profitability
Dun & Bradstreet is a classic business-to-business company. It sells credit information on many companies throughout the world. However, the company recently has morphed into what it calls a “Big Data” information company. D&B provides more than just credit information.
DNB also helps companies expand their sales, marketing and internet footprint with its deep databases on transactions, corporate finance and customers. Over 83% of its sales still come from the U.S.
However, a casual reading of the prospectus shows that Dun & Bradstreet has now become super profitable. For example, adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) in the first quarter was $133.5 million.
But consider this. Sales for the same period came in at $395.3 million. In other words, one third of every sales dollar became adjusted EBITDA profit. That is an incredibly high margin. This is on par with the kinds of margins of many software companies.
Moreover, it appears that D&B’s private equity owners have done a great job. They raised the margins from 23.3% last year when they had just taken the company private to 33.8% this past quarter. That is a great achievement.
However, they have more work to do. For example, Moody’s (NYSE:MCO) made a 50% EBITDA margin this past quarter.
DNB Stock Looks Fully Valued
Right now the company has about $1.5 billion in net debt. I derived this by taking the numbers from the prospectus which shows it had $4.1 billion in debt plus $167 million in cash. Since the company just raised $2.4 billion between the public equity raise and the $400 million from its private equity owners, the net debt is $1.5 billion.
Therefore, we can estimate the company’s enterprise value-EBITDA ratio. Then we can compare that to other companies to see if it is fully valued or not.
For example, DNB’s enterprise value (EV) is $12.2 billion. This is derived by adding $1.5 billion in net debt to its $10.7 billion equity market value.
In addition, we can estimate its annual adjusted EBITDA is $534 million. This is computed by multiplying its $133.5 million Q1 adjusted EBITDA by 4. Perhaps since the company now has more capital it will be more efficient. So we can raise that figure by 10% to $587 million.
Therefore, DNB stock’s EV-EBITDA ratio is almost 21 times. This is calculated by dividing its EV of $12.2 billion by $587 million.
But consider this. Moody’s has an EV-EBITDA ratio of 22.8 times. And remember, I pointed out above that Moody’s also has a much higher EBITDA margin.
Therefore, it seems that DNB could be fairly valued at today’s price. If it raises margins, perhaps the stock could be worth more.
What Should You Do With DNB Stock?
I would wait to see if Dun & Bradstreet can raise its EBITDA margins. At that point, DNB stock might have a chance of being worth more in the future. But right now it looks fairly valued.