Investment Alert: 26.1% Upside In Wide Moat Buffett Style Stock

Ivy Investment Alert: Buy Equifax Under $200/share

Disclaimer: Ivy Investment Alerts have a medium to long-term time horizon. These do not constitute financial advice and you should contact a financial advisor before deciding whether it is appropriate for your individual circumstances.

Key Points

1. Equifax has a sustainable competitive advantage with a “wide moat” due to its position as one of the three largest credit reporting agencies in the United States, along with TransUnion and Experian.
2. It has a strong financial track record, with revenue growth every year over the past decade, and consistently high gross margins and operating income. The company’s levered free cash flow has also been positive in all but one year.
3. A discounted cash flow analysis indicates that Equifax’s fair value is much higher than its current share price, suggesting that the stock is undervalued.

Investment Thesis

When I saw a fund manager overseeing $17 billion had invested almost $900 million into Equifax, I jumped down the rabbit hole to explore why. What I uncovered was a wide moat company that is significantly undervalued.

At first glance, Equifax is a stock that can easily be glossed past. It pays a modest 0.78% dividend – nothing to write home about – and can be easily lumped in with its competitors:

1. TransUnion: A global credit reporting agency that provides credit reports and scores, as well as fraud and identity management solutions, to consumers and businesses.
2. Experian: Provides credit reports and scores, as well as identity and fraud management solutions, to consumers and businesses.
3. FICO: Data analytics company that provides credit scores and other predictive analytics solutions to businesses in various industries, including financial services and healthcare.
4. Dun & Bradstreet: Provider of business credit reports, commercial data, and analytics solutions for businesses.
5. CoreLogic: Property data and analytics solutions for real estate, mortgage, and insurance industries, as well as consumer credit information and risk management services.

However, a closer look reveals a company that clearly enjoys a sustainable competitive advantage. I analyzed the last ten years of financial statements and uncovered an extraordinary statistic: every single year the company grew revenues.

That’s no mean feat during a period of turmoil in 2020-2021. Indeed during 2022, when most other companies suffered Equifax continued to grow. The year with least impressive growth was 2018; it came in at just 1.5%. In 2021, revenue growth was reported at 19.5%, the highest over the past decade.

Better yet, gross margins have not dipped below 56% over the past decade – that’s Alphabet-level high. And last year operating income came in at its highest level over the past ten years, at $1.1 billion.

I then looked at the Cash Flow statement to see how the company was doing in terms of levered free cash flow and discovered that only once in the past decade – in 2018 – did it go negative, and then only slightly.

With the financials looking so good, I decided to run a discounted cash flow forecast analysis to identify where fair value sat, and discovered it sits much higher than where the share price currently is. Fair value is $252 according to my calculations, a full 26.1% higher than where the share price currently sits..

Equifax Has A Buffett Style Moat

When a company can grow revenues in all types of markets, booms and busts, it often is an indication that it possesses a moat, and that’s certainly the case with Equifax.

Equifax’s moat may come from its position as one of the three largest credit reporting agencies in the United States, along with TransUnion and Experian. This gives it a significant advantage in terms of the amount of data it collects and maintains on consumers and businesses, as well as its relationships with financial institutions and other clients.

In addition, Equifax’s large data sets and advanced analytics capabilities may provide a competitive advantage in the market for credit risk management and fraud prevention solutions. The company’s ability to leverage its data to provide unique insights and value to clients also helps it maintain its position in the industry.

What Could Hurt The Investment Thesis?

The credit reporting industry is subject to regulatory oversight and public scrutiny, which could impact Equifax’s ability to maintain its position over the long term.

The company has also faced legal and brand challenges in recent years related to data breaches and privacy concerns. A data breach occurred in 2017, affecting approximately 147 million individuals in the United States, Canada, and the United Kingdom. It was caused by a vulnerability in Equifax’s web application software, which allowed hackers to access sensitive data, including Social Security numbers, birth dates, addresses, and in some cases, driver’s license numbers and credit card information.

The aftermath included several investigations by government agencies and class-action lawsuits filed on behalf of affected individuals. Equifax agreed to pay a settlement of up to $700 million to affected individuals.

A similar type of cybersecurity vulnerability exploited again could hurt Equifax share price. But for now, I believe there are compelling reasons to buy Equifax under $200 per share.