A Dubious Rating For Equifax's Growth Prospects

Equifax (NYSE: EFX), TransUnion and Experian operate an arguable oligopoly when it comes to maintaining and selling consumer credit information. Fair Isaac (NYSE: FICO) also provides FICO scores for consumers that compile data from the three above providers and qualifies as another competitor, but overall the market is concentrated. Unfortunately for Equifax, its core business isn't growing much and has left it relying on less impressive businesses for growth.

IN PICTURES: 7 Tips To Bounce Back From A Credit Score Disaster

Second Quarter Sales Review

Revenue improved 7% to $460.7 million. Equifax reports revenue in three primary segments, the largest of which consists of selling consumer information, such as credit data and information for marketing purposes, to businesses. This unit reported flat sales and accounted for 40% of total quarterly sales. International, the next largest revenue segment, contributed 25.7% to total sales and reported robust top-line growth of 12%. The TALX segment, which competes with the likes of Automatic Data Processing (Nasdaq: ADP), Paychex (Nasdaq: PAYX), and Hewitt Associates (NYSE: HEW), helps clients outsource payroll and human resource functions. TALX revenue jumped 15% to account for 21.5% of total sales.

Profit Recap

Operating income grew 4% to $105.8 million, or an impressive 23% of sales. Every segment logged double-digit growth except for the flagship U.S. consumer segment, which saw profits fall 1%. However, this segment has the highest profit margins at 37.4% and accounted for 64.6% of total quarterly profits.

Gains from the sale of two businesses helped reported net income grow 19.6% to $71.3 million, or 58 cents per diluted share. Net income from continuing operations grew a more modest 2%.

Outlook

For the full year, analysts project modest sales growth of 1.8% to $1.9 billion and earnings of $2.32 per share, which would represent year-over-year growth of more than 20%.

Lower-Margin Businesses Keep Growth Chugging Along

Equifax boasted that its second quarter was "the strongest quarter we have had in a number of years". Management's strategy is to simply grow the top line while controlling costs over time. Unfortunately, its most profitable segment isn't growing much and has left the firm relying on lower-margin businesses to keep growth chugging along.

The divestiture of non-core assets demonstrates that Equifax remains committed to rightsizing its operations, and the firm remains quite profitable overall as it reported net margins of 15.4%, though this will change slightly as it includes the results of the businesses that were sold off.

Growth And Profit Profile Murky Going Forward

There is further upside potential as the economy and consumer spending trends improve, and Equifax is in a solid position as one of three primary credit bureaus. But its growth and profit profile going forward is murky at best. (To learn more, see 5 Keys To Unlocking A Better Credit Score.)

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