Transcript Equifax, Inc.

Equifax, Inc. (EFX)
April 20, 2010, (concluded April 22, 2010)
ALEX FLOREA
MICHAEL LAVIN
ANDREW LEE
CATHERINE LIEN
AKRATI JOHARI
Presentation Overview
 Company Overview
 Industry Overview
 Macroeconomic Analysis
 Competitor Analysis
 Multiples Valuation
 Pro-forma Assumptions
 DCF and WACC Calculation
 Recommendation
Company Overview
 Equifax is the second largest credit reporting agency in
the United States.
 Provides information services to businesses that enable
them to make sound decisions about extending credit or
service, mitigate fraud, manage portfolio risk. The
company also develops marketing strategies for its
clients.
 Located in 15 countries across North America, Latin
America, and Europe, the company primarily operates in
the US. It is headquartered in Atlanta, Georgia and
employs about 6,500 people.
Business Description
 The products and services of the company include consumer credit
information, information database management, marketing information,
business credit information and analytical tools. The company also offers
identity verification services.
 Equifax operates through five reportable segments:


U.S. Consumer Information Solutions
 Consumer information services, mortgage loan origination information services, credit card
marketing services, and consumer demographic and lifestyle information services.
TALX


International



Employment and income verification services, employment tax and talent management
services.
Information services products.
North America Personal Solutions
 Credit information, credit monitoring and identity theft protection products sold directly
to consumers
North America Commercial Solutions
 Commercial products and services such as business credit and demographic information,
credit scores and portfolio analytics (decisioning tools).
5 Point DuPont
2005
2006
2007
2008
2009
29.24%
28.78%
26.38%
25.52%
23.70%
Sales/Assets (asset turnover)
78.81x
86.36x
52.30x
59.37x
51.39x
Interest/Assets (interest expense rate)
1.94%
1.78%
1.66%
2.19%
1.61%
2.23
2.14
2.52
2.48
2.22
1-tax (tax retention rate)
63.55%
65.53%
64.73%
66.82%
67.00%
ROE
20.28%
22.36%
11.09%
11.52%
9.79%
EBIT/Sales (operating profit margin)
Assets/Equity (equity multiplier)
DuPont Chart
EBIT/Sales
(operating profit
margin)
Sales/Assets (asset
turnover)
Interest/Assets
(interest expense
rate)
Assets/Equity (equity
multiplier)
1-tax (tax retention
rate)
2004
2006
2008
2010
Historical ROE
ROE
25.00%
20.00%
15.00%
ROE
10.00%
5.00%
0.00%
2004
2005
2006
2007
2008
2009
2010
Competitive Landscape
 Industry is categorized into two separate groups, credit bureaus and credit rating
agencies (CRA).
 The credit bureau sector is dominated by three major players: Experian, Equifax,
and TransUnion. These entities make up 61.8% of industry revenue.
 Operates in a highly competitive environment, facing competition in geographic,
product and service markets. Industry participants also compete with investment
banks, brokerage firms and institutional investors.
 Compete on price, quality, innovation, responsiveness, and user-friendliness.
 Market Share
 Experian Group 25.9%
 Equifax, Inc. 16.7%
 The McGraw-Hill Companies, Inc. 11.1%
 Moody’s Corporation 10.7%
 Trans Union, LLC. 10.5%
Competitors
 Direct competitors include:
 Other credit bureaus (Experian & TransUnion): Very similar product
mix, same targeted customer base
 Fair Isaac Co. (FICO): Provides similar analytic tools; FICO score
that credit analysis is based on
 Dun & Bradstreet: Provides business level credit scores and analysis
 Rating vary and often multiple agencies are used when a
credit report is requested.
 Credit Rating Agencies face same macro conditions and are
very closely correlated, but not direct competitors.
(Distinction between competitor and comparable company)
Stock Performance
Industry Structure
Life Cycle Stage
Mature
Revenue Volatility
Medium
Investment Requirements
Medium
Industry Assistance
None
Concentration Level
High
Regulation Level
Medium
Technology Change
Medium
Barriers to Entry
High
Industry Globalization
Medium
Competition Level
High
Industry Overview
 In the five years to 2010, the US Credit Bureaus and
Rating Agencies industry revenue increased by an
average annual rate of 3.4% to $8.4 billion; driven by
increased lending activity by banks and increased
popularity of structured debt instruments.
 As a result of the recent recession, industry revenue
declined by an average annual rate of 1.8% in the two
years to 2009.
Industry Outlook
 In the five years to 2015, the US Credit Bureaus and Rating Agencies
industry revenue is expected to increase by an average annual rate
of 8.8% to $12.8 billion.
 As the economy recovers and the financial sector stabilizes, banks
and other lending institutions will begin to increase lending activity.
As lending improves the need for credit bureau services such as
consumer reports and credit card marketing will rise.
 Credit bureaus are expected to continue to diversify operations in an
attempt to increase business and utilize data (possible through
acquisitions; consolidation).
 Firms will also continue to build partnerships with banks and other
consumer lenders in an attempt to target individual borrows.
Key External Drivers
 Household credit market debt
 10-year bond rate
 Real GDP growth
 Per capita disposable income
 Legislative compliance requirements
Household Credit Market Debt
 The industry’s revenue is largely comprised of
income that is generated from rating services related
to consumer debt.
 Credit bureaus benefit from a rise in credit
applications associated with the credit cards,
mortgages or home equity loans.
 While credit rating agencies benefit from the
repacking and sale of consumer loans on the
secondary market
10-Year Bond Rate
 Industry revenue is driven by credit reporting and
rating activity related to consumer and business
debt.
 The industry also benefits from the issuance of debt
securities within the capital markets.
 Interest rates generally affect the rate at which debt
is issued.
 Higher interest rates negatively impact the level of
borrowing and debt issuance, resulting in lower
income for credit bureaus.
Source: IBISWorld.com
Real GDP Growth
 An increase in economic activity is generally associated with a




rise in borrowing by consumers and businesses.
As borrowing increases, credit applications rise and the
demand for credit rating services increases.
Conversely, in poor economic times, borrowing decreases as
consumers and businesses cut spending and management
costs.
Adversity within the secondary market also affects the
issuance of debt, decreasing the demand for credit rating
services.
According to Consensus Economics, US Real GDP growth
expected to grow (YOY) by 3.1% in 2011, 3.0% in 2012-2016,
and 2.6% in 2017-2021.
Source: http://www.consensusforecasts.com/special_data.htm
Per Capita Disposable Income
 An increase in real disposable income generally leads
to a rise in borrowing activity, which is beneficial to
the US Credit Bureaus industry.
 Access to capital increases as disposable income
rises.
 Individuals with higher levels of disposable income,
generally have stronger credit records, allowing them
to borrow money.
 For example, individuals with strong credit records,
income and savings are approved for mortgages at
higher rates then poorer people.
Legislative Compliance Requirements
 The legislative compliance requirements are
government policies relating to credit rating
methodologies, practices and accountability.
 Any rise in legislative compliances on credit rating
activity increases the cost of providing services.
Increased Regulation
 Since the start of the recession, the industry has been
scrutinized for its involvement in the rating and structuring of
complex debt products.
 Critics blame the industry for not identifying the systematic
risks associated with packaging low quality subprime
mortgages into securities that were sold as high quality
investment grade products.
 Larger CRAs also faced scrutiny for not maintaining
objectivity when assessing debt instruments.
 As a result, the industry has begun to face tougher regulation
from the SEC and other government agencies.
SWOT Analysis
 Strengths:



Diversified business mix helps
reduce earnings volatility.
Consistent industry recognition.
Strong and growing international
franchise offsetting slowdown in
the US.
 Opportunities:




Increase penetration of customers’
information solution needs
Deploy decisioning technologies
and analytics globally
Investing in unique data sets
likely to increase competitive
edge.
Pursue new vertical markets and
expand into emerging markets.
 Weaknesses:


Increased leverage on balance
sheet, resulting from acquisitions,
could affect Equifax’s margins.
Weak presence in online mortgage
market gives Experian a
competitive edge.
 Threats:



Competition intensifying due to
acquisitions and organic growth
initiatives of peers.
Economic weakness and
uncertainty could materially affect
the company
Growing popularity of search
engines may affect demand for
Equifax’s products.
Comparables Analysis
Values as of:
4/4/2004
Market Cap Shares Out Revenue EBITDA EBITDA Margin
EPS
Trailing P/E Forward P/E
P/S
TEV/EBITDA
Alliance Data Systems Corporation ADS
3,379
53
1,964
487
25%
2.69
24.7
12.5
1.7
13.2
Dun & Bradstreet Corp.
DNB
3,751
50
1,687
546
32%
5.34
14.1
13.5
2.2
8.2
Experian plc
EXPN
6,690
1,026
3,730
1,108
30%
0.45
23.6
17.2
2.9
11.1
FactSet Research Systems Inc.
FDS
3,468
47
622
252
40%
2.88
26.5
25.5
5.6
13.0
Fair Isaac Corp.
FICO
1,185
46
619
168
27%
1.44
17.8
18.4
1.9
8.4
Fiserv Inc.
FISV
7,788
152
4,077
1,234
30%
3.02
17.0
14.0
1.9
8.9
Moody's Corp.
MCO
6,950
237
1,797
769
43%
1.76
16.8
17.5
3.9
9.9
The McGraw-Hill Companies, Inc.
MHP
315
5,952
1,440
24%
2.40
14.9
15.8
1.9
7.8
Equifax Inc.
EFX
32%
1.88
19.3
19.5
2.5
9.5
Minimum
Median
Average
14.1
17.4
19.4
12.5
16.5
16.8
1.7
2.1
2.7
7.8
9.4
10.1
Maximum
26.5
25.5
5.6
13.2
5,008.31
5,946.72
11,216
4,511 126
1,825 591
Spread
Analysis
Implied Enterprise Value
Implied Per Share Value
36.44
31.49
39.67
47.10
Management Assessment
 Based on the uncertainty in the global economy,, we expect
revenue in the first quarter of 2009 to be similar to the fourth
quarter of 2008 (Annual Report 2008)


4th Quarter 2008 revenues = $464.2 million
1st Quarter 2009 revenues = $452.9 million
 Based on current rates of economic and credit activity in the
U.S., we currently expect revenue in the OCIS and Credit
Marketing Services lines and in the overall USCIS segment in
2009 to be below levels achieved in 2008. (Annual Report
2008)
Management Assessment
 Realizing cost savings from 2009 restructuring


LEAN & Work – Out
14.4MM charge recorded related to headcount reduction and contractual costs
 Potential Liability


Entered into put contract with Computer Science Corporation for credit reporting business
$675MM in 2013
 Share Repurchase

122MM reserved for 2009
Revenue Assumptions
ASSUMPTIONS
2010
2011
2012
2013 2014
U.S. Consumer Information Solutions
0%
2%
3%
2%
4%
International
0%
4%
4%
3%
8%
TALX
3%
4%
5%
3%
8%
North America Personal Solutions
0%
5%
8%
6%
11%
North America Commercial Solutions
0%
5%
6%
5%
9%
Sales growth rate:
COGS/Sales
41.13% 41.13% 41.13% 41.13% 41.13%
SG&A/Sales
25.75% 25.75% 25.75% 25.75% 25.75%
Depreciation as % of PPE
23%
23%
23%
23%
23%
Income Tax
35%
35%
35%
35%
35%
DCF
DCF Valuation
PV of Firm
Less Net Debt
Equity Value of Firm
Shares Outstanding
Value per Share
FCF Multiple
5,145.86
1,189.59
3,956.26
126.36
Average
4,989.82
1,189.59
3,800.23
126.36
Perpetuity
Growth
4,833.79
1,189.59
3,644.20
126.36
$31.31
$30.07
$28.84
Value Triangulation
Method
DCF - Perpetuity
DCF - FCF Multiple
2014 P/E Multiple
2014 P/S Multiple
2014 TEV/EBITDA Multiple
Weighted Per Share Value
Value
$28.84
$31.31
$30.94
$39.67
$43.98
Weight
25%
25%
25%
10%
15%
Value
7.21
7.83
7.74
3.97
6.60
$33.34
WACC
ROE
5 Year Beta
Risk Free
Equity
Premium
CAPM
Cost of Debt
Market Cap
Debt
Total Capital
8.62%
Equity Weighting
Debt Weighting
Tax Rate
79.4%
20.6%
35.00%
CAPM
ROE
10.84%
15.00%
Goalpost WACC
CAPM
ROE
11.67%
80%
20%
WACC
10.08%
0.93
3.890%
7.500%
10.841%
6.09%
4.54B
1.18B
5.72B
Correlation
MOS
MCD
WFR
AEO JKHY
DO
WAG
MOS
1.00
MCD
0.68
1.00
WFR
0.50
0.08
1.00
AEO
-0.21
-0.30
0.53
1.00
JKHY
0.47
0.47
0.65
0.43
1.00
DO
0.86
0.74
0.55
-0.02
0.73
WAG
-0.43
-0.69
0.22
0.69
0.12 -0.30
1.00
EFX
-0.01
-0.36
0.65
0.73
0.46
0.70
EFX
1.00
0.10
1.00
Recommendation
 Triangulated intrinsic value for EFX is $ 33.34
 DCF Valuation ranges between $28.84 and $31.31
 Comparables Valuation ranges between $31.31 and $43.98
 EFX is currently trading at $35.37 as of 4/21
 Negative correlation with MOS & MCD, but high
correlation with AEO & WAG
 Pursue new vertical markets and expand into
emerging markets.
 Recommendation: Put it on the watch list