Experian (EXPGY): An Expensive Stock For Retail Investors

Too Tipsy for Us

Our former family wholesale business was once a faithful user of Experian plc (OTCQX:EXPGY) ADR services to guide us in building business relationships with over 3K customers. At this time, we go against the trend among Seeking Alpha and Wall Street analysts assessing Experian stock as a Buy and Strong Buy opportunity, respectively. at over $36 each.

In our opinion, retail value investors who bought shares 4 weeks ago nearer to $29 each might consider this a Sell opportunity or at least Hold since the last close over $36. The share price might climb higher on its strong momentum and increasing revenue and earnings forecasts.

But factors worrying us about Experian plc for retail value investors include its share price volatility, a low Factor Grade for dividend safety, and the failing grade for its valuation. The share price is approaching its 52-week high of $39.78.

Profile

Experian plc is a global technology company based in Dublin. Experian services commercial and consumer sectors. The company is ranked 6th on the 2023 IDC FinTech Rankings up from 9th last year. The FinTech Rankings evaluate the top 100 providers of financial technology.

Experian collects, analyzes, and guides firms from its predictive Big Data collection, software, and platforms, on matters involving advanced analytics and modeling, cloud applications, collections and debt recovery, credit decision-making, and customer management. The data the company provides can affect employer decisions, fraud management, and identity theft. Experian’s Big Data can help with marketing, regulation compliance, and risk management.

Experian’s consumer services provide credit scores and cash alerts. Using The Experian Smart Money™ Debit Card, the company’s digital credit checking, credit card matching service, and free identity scan, might appear favorable to some lenders possibly extending or boosting consumer credit.

Downwinds

The industry’s reputation depends on the reliability of data. Experian in particular, as the largest personal data information services company addressing credit, faces persistent criticism caused by errors in data resulting in government probes of consumer complaints and threats from lawmakers and NGOs. They talk about limiting access to personal information and the extent to which it can be shared with third parties.

Student loan debts on credit reports are a contentious matter in this mix. Medical debt accounts for “58% of all third-party debt collection on consumer credit reports.” Experian and peers are facing off against the White House and federal agencies that want “to remove medical bills from credit reports” because medical debt is a major factor in evaluating credit scores. The success of actions to pass laws and enact tighter regulations against the industry might decrease the value of credit reports to lenders and send shockwaves through the industry.

Experian plc stock popped after the pandemic when consumers spent money they had been saving for 18 months by eating at home, limiting travel and social gatherings, and spending on new clothes, cars, etc. By July ’22, Experian stock topped $48 per share. Since mid-year 2022, the share price slumped. Its volatility quotient jumped. Shares are up ~6% over the last 12 months including +7.55% YTD.

According to infrontanalytics.com, the levered/unlevered Beta of Experian stock is a high 1.12. But high volatility applies to its peers, as well, and, while risk-takers might enjoy the challenge, we value stability in times of political and social turmoil. It is important to note that the Experian share price has outperformed the sector median all year.

The metrics for the dividend yield are particularly low relative to free cash flow (1.94%), net long debt to assets, and cash per share. The S A Quant Rating historically waivers between Sell and Hold. The valuation is especially worrisome with the leading economic index from the Conference Board falling month over month for 19 consecutive months. By nearly every metric, Experian plc’s dividend yield gets a D grade.

Credit Industry & Experian Forecasts

Perhaps if the share price was irrationally low, as Experian was down to $29 just 4 weeks ago, the positive trend among analysts could be justified. The research and credit market is experiencing solid growth. Research and Markets forecast in a new report that industry growth can be expected from ~$109B in 2022 to $125B in 2023, with an annual CAGR rate of 12.6%. The market will hit +$200B in 4 years. Experian by its size and market power will grow with the industry; in addition, the company is developing new technologies and expanding in Latin America and South America.

Being an ADR based overseas, reporting requirements are not the same as for U.S.-based publicly traded corporations. FY ’23 ended strong as reported in March ’23. This month, the company reported earnings highlights for the first half of FY ’24. Experian plc will probably report its full FY ’24 earnings in May ’24:

• Q1 and Q2 ’24 organic revenue grew 5% each quarter to $3.42B in the first half of FY ’24 from $3.25B the year before.
• It served 178M free members or +21M Y/Y.
• B2B organic revenue grew 4% from new product performance and business development according to management.
• There was double-digit growth in Latin America and consistency everywhere else.
• Benchmark EBIT from ongoing activities rose 6% to $929M, with the Benchmark EBIT margin of 27.2%, up 20 basis points at constant currency rates.
• Net debt to EBITDA was 1.8x.
• Benchmark EPS was +8%, at actual exchange rates and basic EPS was +86%.
• Statutory profit before tax was $763M in H1, or 48% more due to revenue growth and reduced non-benchmark costs.
• The first interim dividend was up 6% and the dividend is covered by earnings and cash flows.

If the growth rate for the credit industry and Experian plc holds, we agree with the consensus that annual EPS in FY ’24 and FY ’25 will be up 8% to 10%, respectively Y/Y. Growth is steady if not flashy and much of the revenue growth is generated from M&A actions. Profitability and momentum are good and a credit to management.

Last Credit Check

Experian plc is a financially healthy company able to manage its debt and is reducing it, and the stock has momentum. Ken Fisher of Fisher Asset Management is a top shareholder; he sports a great track record. Meantime, it appears Fisher and or other hedge funds have been reducing holdings between May and November 2023.

The company’s P/E Non-GAAP (FWD) ratio at 25.43 is on the high side of what we prefer and the P/E GAAP (TTM) is almost 33. The safety of the dividend is tied largely to the valuation and both are shaky.

Experian management uses cash and has built debt to constantly upgrade its technology which is the engine driving the company; it must keep errors in information to a minimum in its quest to build its Big Data treasure. It also uses cash and debt to acquire companies. Experian acquired 68 firms, 7 in the last 5 years, which accounts for significant contributions to the company’s revenue growth. 38% of the acquired companies are in the internet software and services business and 24% in software. The company claims it pays an effective interest rate on loans and bond debt of 2.7% as of March ’23 which contributes to its ability to pay down debt.

But the shares trade at about 39xs earnings; we do not foresee the share price climbing much higher in the next 6 months and the dividend yield is not attractive enough to warrant more than retail investors Holding the shares. It seems prudent to us, taking into account the valuation and growth grades, as a profit-taking opportunity if the shoe fits.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.