Equifax (NYSE:EFX) is best known as one of three credit bureaus and its credit score that businesses rely on when issuing credit cards or other forms of credit. This business has tons of appeal from an investment standpoint, but there are other considerations to determine if this applies to Equifax overall.
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Equifax bills itself as "a leading global provider of information solutions for businesses and consumers," and operates in five primary business segments. The flagship unit accounted for the highest percentage of revenue last year and compiles consumer information to create credit scores and other credit information, demographic and lifestyle information. The TALX segment provides employment and income verification services.
International is its own segment. Equifax operates in North America, Europe and Latin America, and while the majority of revenue (73%) of revenue stemmed from the U.S. last year, international is a targeted growth avenue. The remaining units provide credit and related information about consumers and businesses, respectively and collectively accounted for just over 12% of sales last year.
Compiling credit and other data may be mundane, but it is very lucrative. Operating margins ranged across segments between 17.4% and 37.9% last year, with the flagship U.S. Consumer Information operations being the most profitable. Service revenue also requires low levels of capital to grow and maintain the business: over the past three years, free cash flow has exceeded reported net income.
Equifax lists Dun & Bradstreet (NYSE:DNB) as a primary competitor for Equifax's commercial services segment as it specializes in tracking information on businesses. It considers Harte-Hanks (NYSE:HHS) and infoGROUP (Nasdaq:IUSA) rivals in its marketing services while FICO (NYSE:FIC) and TransUnion compete to sell credit scores, with Experian of the U.K. being the other big player in the area.
The Bottom Line
Equifax's core operations are impressively profitable and consistently posts double-digit net income margins, as do peers Experian and D&B. But Experian has been diversifying out of these businesses into ones with more questionable margin profiles. TALX was acquired in May 2007 and has the lowest profit margins. The last couple of years have also seen higher levels of capital expenditure and debt levels, which is due in part to the TALX acquisition and could also be due to overall spending to add new revenue sources.
It is undeniable that demand for Equifax services were unsustainably high as low interest rates and a housing boom drove the need for credit score checks and other background data. Easy credit is no longer the norm, but will eventually recover to again benefit Equifax. But its move into businesses with more dubious economic moats is more uncertain, and is a primary reason to consider staying on the sidelines as an investor. (Find out which catalysts can turn struggling stocks around in our related article Turnaround Stocks: U-Turn To High Returns.)