EFX Stock Study (2-17-23)
Posted by Mark on March 2, 2023 at 06:28 | Last modified: March 13, 2023 15:13I recently did a stock study on Equifax Inc. (EFX) with a closing price of $213.00.
M* writes:
> Along with Experian and TransUnion, Equifax is one of the
> leading credit bureaus in the United States. Equifax’s credit
> reports provide credit histories on millions of consumers,
> and the firm’s services are critical to lenders’ credit
> decisions. In addition, about a third of the firm’s revenue
> comes from workforce solutions, which provides income
> verification and employer human resources services.
This medium-sized company has grown sales and earnings at annualized rates of 9.3% and 7.6% over the last 10 years, respectively. This excludes ’19 for EPS: a downside outlier (-$3.30/share due to $1.13B in expenses from a 2017 cybersecurity incident). Lines are mostly up, straight, and parallel except for EPS dips in ’18 and ’22. PTPM was stable around 23% for ’13-’17 before diving in ’18-’19 and has been recovering since. The last-5-year average (excluding the outlier) is 16.1%, which beats peer and industry averages.
Historical ROE looks similar to PTPM with a last-5-year average of 16.5% (excluding ’19). This is lower than peer and industry averages. Debt-to-Capital has increased from 38.5% (’13) to 59.4% (’22) with a last-5-year average of 55.9%. Interest Coverage is 6.5 and Quick Ratio is 0.54. While these may raise some concern, Value Line rates the company A for financial strength and M* describes the balance sheet as “sound” while awarding an Exemplary rating for capital allocation.
I forecast long-term annualized sales growth of 6% based on the following:
- CNN Business projects 3.9% YOY and 7.6% per year for ’23 and ’22-’24, respectively (based on 19 analysts).
- YF projects YOY 3.9% and 10.1% for ’23 and ’24, respectively (18 analysts).
- Zacks projects YOY 4.2% and 9.2% for ’23 and ’24, respectively (10).
- Value Line projects 6.4% annualized growth from ’21-’27.
- CFRA projects 3.9% YOY and 6.7% per year for ’23 and ’22-’24, respectively (6).
- M* gives a 2-year ACE of 7.7% annualized while also estimating 9% per year for the next five years in its analyst report.
I am projecting toward the low side.
I forecast long-term annualized EPS growth of 8% based on the following:
- CNN Business projects a 4.6% YOY contraction and 9.6% growth per year for ’23 and ’22-’24, respectively (based on 19 analysts) along with 5-year annualized growth of 10.1%.
- MarketWatch projects annualized growth of 9.8% and 10.2% for ’22-’24 and ’22-’25, respectively (22 analysts).
- Nasdaq.com projects annualized growth of 23.6% and 20% for ’23-’25 and ’23-’26, respectively (10, 6, and 3 analysts for ’23, ’25, and ’26).
- Seeking Alpha projects 4-year annualized growth of 9.7%.
- YF projects YOY 5% contraction and 26.3% growth for ’23 and ’24, respectively (16), along with 5-year annualized growth of 12.7%.
- Zacks projects YOY 3.4% contraction and 24.4% growth for ’23 and ’24, respectively (15), along with 5-year annualized growth of 14.4%.
- Value Line projects annualized growth of 7.1% from ’21-’27.
- CFRA projects 3.7% YOY contraction and 12.2% growth per year for ’23 and ’22-’24, respectively (7), along with 16% growth per year from ’21-’24.
- M* projects an annualized long-term growth rate of 12.8%.
I am projecting below the average [of six] long-term estimate[s] (11.1%).
My Forecast High P/E is 35. Excluding NMF in ’19, high P/E has trended up from 25.9 (’13) to 52.2 with a last-5-year average of 51.1.
My Forecast Low P/E is 25. Excluding ’19, low P/E has trended up from 19.6 (’13) to 25.8 (22) with a last-5-year average of 28.2.
My Low Stock Price Forecast is the default $141.30: just below the 52-week low of $146 and 33.7% below the previous close.
The lowest Payout Ratio in the last 10 years (excluding ’19 when the dividend was suspended due to one-time expenses) was 25.9% (’21) and the last-5-year average is 38.4%. I am estimating conservatively at 25%.
These inputs land EFX in the HOLD zone with an U/D ratio of 1.1. The Total Annualized Return (TAR) is 7.1%.
TAR is less than I want for a medium-sized company, which means the more conservative PAR (using Forecast Average, not High, P/E) will certainly be too low. The latter currently sits at 4%.
I like to assess margin of safety by comparing my inputs with Member Sentiment (MS). Out of [only] 22 studies over the past 90 days (my own excluded), projected sales, projected EPS, forecast High P/E, forecast Low P/E, and Payout Ratio average 6.3%, 11%, 34.1, 23.3, and 36.3%, respectively. My P/E range is actually higher than MS although my EPS growth rate is lower. Value Line projects an average annual P/E of 25, which is lower than MS (28.7) and much lower than mine (30).
M* writes:
> …we are maintaining our fair value estimate of $315. This equates to a
> 2023 price/adjusted earnings ratio of approximately 43 times and a 2024
> price/adjusted earnings ratio of approximately 31 times. While these
> multiples might seem high, we believe they are warranted, given Equifax’s
> unique position in income and employment verification services.
I don’t agree that the premium is warranted, but I have somehow ended up assigning one anyway. Lowering my P/E range would move EFX even farther from the Buy zone.
I’ve done 82 stock studies to date and never been higher with my forecast P/E range. That this happened at all makes me want to scrap the whole study even though I felt the forecasts were conservative when I chose them.
I will repeat this again next quarter.
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