Experian is well-placed to benefit from Equifax’s woes, but its shares look expensive
Two of the credit checker’s divisions are delivering but consumer-services questions remain, says James Ashton
IF DATA are the new oil, does that make Experian the new BP? The £15bn credit checker has been a FTSE 100 stalwart since it gained its independence from retailer Argos a little over a decade ago, but the dividend yield of 2pc is a long way short of the payout gusher investors rely on from the energy giant.
The voguish expression refers less to shareholder returns and more to the growth in a valuable resource that will power the economy long after BP’S last well has run dry.
How much easier it is to profit by drilling into reams of information instead of the bowels of the earth, an unstable occupation that can lead to disasters such as the Deepwater Horizon oil spill in the Gulf of Mexico. But data is not without risk, as the numerous organisations that have suffered cyber attacks this year show. Experian has four divisions. Credit services accounts for half of the business and it collects and analyses more than one billion credit histories to inform lenders and credit card firms if new customers are a safe bet. Decision analytics uses data to minimise fraud risk and spot which customers have grown unhappy with the service they are receiving. Marketing services enables clients to plan their marketing campaigns and track responses.
The fourth division, consumer services, lets individuals monitor their credit score. It has been the laggard as Experian attempts to create a giant, free membership base from which it can generate new revenues. So far it has 12m members signed up in the UK and US, and high hopes for Identity works, a subscription-based identity monitoring service, and Lending works, a comparison service for loans and credit cards. The last quarter illustrates the challenge. Group underlying sales growth was 4pc, with decision analytics and marketing services strongly ahead.
However, consumer services slid 8pc with particular weakness in the UK. Analysts at Goldman Sachs remain bullish on the division, pointing out that the new products introduced in the US should gain scale as they are rolled out in the coming months.
That may contribute to a return to growth in the second half. Watch out for signs of divisional progress when half-year results are posted on Nov 15. Experian shares have been directionless this year. They currently trade 7pc below their May peak, reached around the time of their full-year results announcement, but 9pc higher than the trough they hit in the aftermath of the Equifax data breach.
Experian’s American rival made headlines for one of the largest-ever data breaches as personal details of 143m Americans were compromised after a cyber attack. Equifax is not alone.
Experian had its crisis early when the details of 15m T-mobile customers leaked out two years ago. This time around, Experian might be able to increase market share at the expense of Equifax, but, all things being equal, data is going to become a more expensive business. US politicians are training their sights on the industry. Experian boss Brian Cassin was among several consumer credit checking leaders that declined to appear before a panel of House Democrats late last month.
On this side of the Atlantic, the European Union’s General Data Protection Regulation (GDPR), which comes into force next May, makes life harder for any company managing consumer data, with harsher fines promised for those that fail to protect sufficiently against attacks.
Of greater concern is the credit outlook. Central bankers are becoming exercised about credit bubbles, with car finance and credit cards areas of worry. Banks are reining in offers and rising interest rates stand to cool matters further. Experian is reliant on the volume of activity. While pointing out the high barriers to entry in this sector, Morgan Stanley reduced its forecasts for the credit services division in the UK and US over summer.
Experian has a strong balance sheet, with a $600m share buy-back promised this year on top of $734m repurchased last year. The group has also shown willingness to tighten its portfolio. Earlier this year it sold a majority stake in its low-margin email marketing arm in a transaction that gave the unit a £320m enterprise value. But trading at close to 20 times next year’s forecast earnings, Experian shares should be avoided for now. Better sticking with oil instead.