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The January Factsheet for the CFP SDL UK Buffettology Fund (covering December 2018) has revealed that it has bought into the consumer credit reporting agency Experian (EXPN). The fund (in the IA All Companies sector) is run by Keith Ashworth-Lord and has 30 holdings.
Experian share price £19.12 on 31 Jan 2019 close; market cap £17.3 billion
- Experian describes itself as "the world's leading global information services company."
- Experian is the most profitable of the three main US consumer credit reporting agencies.
- Experian's EBIT profit margin is robust at 28% versus Equifax is at 25% and Transunion is at 24%.
- The cost of replicating Experian's consumer database provides a powerful barrier to entry.
The CFP SDL UK Buffettology Fund has performed well since launch with a 193% increase from April 2011 to December 2018 versus 60% for the sector. This makes it the top ranking fund in its sector and it is therefore worth paying attention to.
Experian was added to the fund in December 2018 and a rough estimate of the average entry price is £18.7. Keith Ashworth-Lord had this to say about Experian in the January fund fact sheet:
I also added Experian to the portfolio for the first time. This FTSE 100 company is one the top three global credit checking agencies - a spin out from Great Universal Stores in 2006 - and has been on the `watch list' for some time.
Experian share price performance since 2014
Experian versus rivals
The majority of Experian's revenue at 57% comes from North America where the group competes with Equifax and TransUnion (both US listed). Experian is a global player while Equifax and TransUnion are both focused on the North American market.
Experian versus rivals
Experian generates 18% of revenue from the UK & Ireland, Latin America accounts for 17% of revenue and EMEA/Asia Pacific accounts for the remaining 8%. The main driver for the business is the Data Division at 55% of revenue while the Consumer Services division, that advertises on TV, is 20% or revenue.
Experian's industry exposure is relatively diversified but the financial services sector accounts for 34% of revenue. Financial firms are clearly keen to understand if prospective clients will make good on any loans.
Experian revenue mix (fiscal year to March 2018)
Consumer data sector: quality and valuations
Looking at the three sector leaders and Equifax (US$13bn) was hit by a data breach in 2017 (the company is held in the Smithson Investment Trust; SSON). Equifax trades on a rolling forward P/E ratio of 18.2X while Transunion (US$10bn) trades on a rolling forward P/E of 21.6X.
Experian is the most expensive of the bunch with it trading on a rolling forward P/E of 23X. However, Experian is also the most profitable of the three with a three year average lease-adjusted ROCE (excluding goodwill) at 59%.
The same metric for Equifax comes in at 44.5% and for Transunion the figure is 13.6%. Bigger appears to be better in the consumer credit reporting sector.
The EBIT profit margin Experian and Equifax has generally been over 20% since 2006. This suggests that the two largest consumer credit reporting firms have stable market positions and are relatively defensive.
Experian quality ratios and growth
Experian appears to be a quality business with the latest annual lease-adjusted ROCE excluding goodwill at 62.8%. If we include goodwill the figure falls to 20% and the cashflow return on investment (CROCI) was 14.1%.
Experian had £4.45 billion goodwill on its balance sheet at March 2018 versus the group's current market value of £17.3 billion. Acquisitions undertaken in the past have reduced the return on capital but the underlying business (excluding the premium paid for acquisitions) generates high returns.
Experian generates good returns (fiscal year to March)
Revenue growth at Experian hasn't been particularly strong since 2006 . The top line did hold up well during the financial crisis but it weakened in fiscal 2016.
Experian doesn't appear to have a strong underlying growth driver. However, organic revenue growth in fiscal 2018 came in at 5% while total revenue growth was 7% (both at constant exchange rates).
Experian has seen modest growth (fiscal year to March)
Looking at Experian's annual revenue growth and the figure has fluctuated from year to year. Little growth was seen in 2010 and 2011 while revenue declined in 2015 and 2016.
The outlook is more positive with revenue expected to increase by 4.5% in 2019, 7.7% in 2020 and 6.9% in 2021.
Experian's valuation (£19.12 share price)
It is not clear if the Buffettology fund has bought into Experian at an attractive valuation. Shares in the consumer credit reporting agency rose by 19.1% in 2018 and the forecast rolling P/E is currently 23X. The free cashflow yield is, however, forecast to hit 5.3% in fiscal 2021.
Experian historic and forecast P/E ratio
Experian historic daily P/E on last 12 months reported earnings
Fund Hunter Comment
Experian is a profitable and stable business with an EBIT margin of 28%. The ROCE excluding goodwill is 62.8% with consumer credit reporting not a capital intensive sector.
Revenue growth has also been modest in recent years and the P/E multiple at which the Buffettology fund bought into Experian is not cheap by recent standards.
On face value, Experian appears to be the archetypal slow growth, highly-rated, quality stock. Unless the pace of organic growth improves the near-term outlook for the shares appears unexciting.
However, Experian is the market leader and should hold up well in an economic downturn. Experian is not going to "shoots the lights" out but it does provide a reasonable core portfolio holding.
The Buffettology fund's purchase of a FTSE 100 company may signal a move up the market cap spectrum.
1. Experian is covered in the book "Quality investing: owning the best companies for the long term" (P 120-121). The main argument is that the cost of replicating Experian's consumer database is very high.
2. Experian financial charts
2. Experian financial charts
DuPont Analysis: Experian's has seen its ROCE improve since 2007
Experian free cashflow margin: above 15%
Experian balance sheet: Total borrowing has been stable over the long-term