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Equifax, Inc. (EFX) April 20, 2010, (concluded April 22, 2010). Alex Florea Michael Lavin Andrew Lee Catherine Lien Akrati Johari. Presentation Overview. Company Overview Industry Overview Macroeconomic Analysis Competitor Analysis Multiples Valuation Pro-forma Assumptions

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equifax inc efx april 20 2010 concluded april 22 2010

Equifax, Inc. (EFX)April 20, 2010, (concluded April 22, 2010)

Alex Florea

Michael Lavin

Andrew Lee

Catherine Lien

Akrati Johari

presentation overview
Presentation Overview

Company Overview

Industry Overview

Macroeconomic Analysis

Competitor Analysis

Multiples Valuation

Pro-forma Assumptions

DCF and WACC Calculation

Recommendation

company overview
Company Overview
  • Equifax is the second largest credit reporting agency in the United States.
  • Provides information services to businesses that enable them to make sound decisions about extending credit or service, mitigate fraud, manage portfolio risk. The company also develops marketing strategies for its clients.
  • Located in 15 countries across North America, Latin America, and Europe, the company primarily operates in the US. It is headquartered in Atlanta, Georgia and employs about 6,500 people.
business description
Business Description
  • The products and services of the company include consumer credit information, information database management, marketing information, business credit information and analytical tools. The company also offers identity verification services.
  • Equifax operates through five reportable segments:
    • U.S. Consumer Information Solutions
      • Consumer information services, mortgage loan origination information services, credit card marketing services, and consumer demographic and lifestyle information services.
    • TALX
      • Employment and income verification services, employment tax and talent management services.
    • International
      • Information services products.
    • North America Personal Solutions
      • Credit information, credit monitoring and identity theft protection products sold directly to consumers
    • North America Commercial Solutions
      • Commercial products and services such as business credit and demographic information, credit scores and portfolio analytics (decisioning tools).
competitive landscape
Competitive Landscape
  • Industry is categorized into two separate groups, credit bureaus and credit rating agencies (CRA).
  • The credit bureau sector is dominated by three major players: Experian, Equifax, and TransUnion. These entities make up 61.8% of industry revenue.
  • Operates in a highly competitive environment, facing competition in geographic, product and service markets. Industry participants also compete with investment banks, brokerage firms and institutional investors.
  • Compete on price, quality, innovation, responsiveness, and user-friendliness.
  • Market Share
    • Experian Group 25.9%
    • Equifax, Inc. 16.7%
    • The McGraw-Hill Companies, Inc. 11.1%
    • Moody’s Corporation 10.7%
    • Trans Union, LLC. 10.5%
competitors
Competitors
  • Direct competitors include:
    • Other credit bureaus (Experian & TransUnion): Very similar product mix, same targeted customer base
    • Fair Isaac Co. (FICO): Provides similar analytic tools; FICO score that credit analysis is based on
    • Dun & Bradstreet: Provides business level credit scores and analysis
    • Rating vary and often multiple agencies are used when a credit report is requested.
  • Credit Rating Agencies face same macro conditions and are very closely correlated, but not direct competitors. (Distinction between competitor and comparable company)
industry overview
Industry Overview
  • In the five years to 2010, the US Credit Bureaus and Rating Agencies industry revenue increased by an average annual rate of 3.4% to $8.4 billion; driven by increased lending activity by banks and increased popularity of structured debt instruments.
  • As a result of the recent recession, industry revenue declined by an average annual rate of 1.8% in the two years to 2009.
industry outlook
Industry Outlook
  • In the five years to 2015, the US Credit Bureaus and Rating Agencies industry revenue is expected to increase by an average annual rate of 8.8% to $12.8 billion.
  • As the economy recovers and the financial sector stabilizes, banks and other lending institutions will begin to increase lending activity. As lending improves the need for credit bureau services such as consumer reports and credit card marketing will rise.
  • Credit bureaus are expected to continue to diversify operations in an attempt to increase business and utilize data (possible through acquisitions; consolidation).
  • Firms will also continue to build partnerships with banks and other consumer lenders in an attempt to target individual borrows.
key external drivers
Key External Drivers

Household credit market debt

10-year bond rate

Real GDP growth

Per capita disposable income

Legislative compliance requirements

household credit market debt
Household Credit Market Debt

The industry’s revenue is largely comprised of income that is generated from rating services related to consumer debt.

Credit bureaus benefit from a rise in credit applications associated with the credit cards, mortgages or home equity loans.

While credit rating agencies benefit from the repacking and sale of consumer loans on the secondary market

10 year bond rate
10-Year Bond Rate

Industry revenue is driven by credit reporting and rating activity related to consumer and business debt.

The industry also benefits from the issuance of debt securities within the capital markets.

Interest rates generally affect the rate at which debt is issued.

Higher interest rates negatively impact the level of borrowing and debt issuance, resulting in lower income for credit bureaus.

real gdp growth
Real GDP Growth

An increase in economic activity is generally associated with a rise in borrowing by consumers and businesses.

As borrowing increases, credit applications rise and the demand for credit rating services increases.

Conversely, in poor economic times, borrowing decreases as consumers and businesses cut spending and management costs.

Adversity within the secondary market also affects the issuance of debt, decreasing the demand for credit rating services.

According to Consensus Economics, US Real GDP growth expected to grow (YOY) by 3.1% in 2011, 3.0% in 2012-2016, and 2.6% in 2017-2021.

Source: http://www.consensusforecasts.com/special_data.htm

per capita disposable income
Per Capita Disposable Income

An increase in real disposable income generally leads to a rise in borrowing activity, which is beneficial to the US Credit Bureaus industry.

Access to capital increases as disposable income rises.

Individuals with higher levels of disposable income, generally have stronger credit records, allowing them to borrow money.

For example, individuals with strong credit records, income and savings are approved for mortgages at higher rates then poorer people.

legislative compliance requirements
Legislative Compliance Requirements

The legislative compliance requirements are government policies relating to credit rating methodologies, practices and accountability.

Any rise in legislative compliances on credit rating activity increases the cost of providing services.

increased regulation
Increased Regulation

Since the start of the recession, the industry has been scrutinized for its involvement in the rating and structuring of complex debt products.

Critics blame the industry for not identifying the systematic risks associated with packaging low quality subprime mortgages into securities that were sold as high quality investment grade products.

Larger CRAs also faced scrutiny for not maintaining objectivity when assessing debt instruments.

As a result, the industry has begun to face tougher regulation from the SEC and other government agencies.

swot analysis
SWOT Analysis
  • Strengths:
    • Diversified business mix helps reduce earnings volatility.
    • Consistent industry recognition.
    • Strong and growing international franchise offsetting slowdown in the US.
  • Opportunities:
    • Increase penetration of customers’ information solution needs
    • Deploy decisioning technologies and analytics globally
    • Investing in unique data sets likely to increase competitive edge.
    • Pursue new vertical markets and expand into emerging markets.
  • Weaknesses:
    • Increased leverage on balance sheet, resulting from acquisitions, could affect Equifax’s margins.
    • Weak presence in online mortgage market gives Experian a competitive edge.
  • Threats:
    • Competition intensifying due to acquisitions and organic growth initiatives of peers.
    • Economic weakness and uncertainty could materially affect the company
    • Growing popularity of search engines may affect demand for Equifax’s products.
management assessment
Management Assessment

Based on the uncertainty in the global economy,, we expect revenue in the first quarter of 2009 to be similar to the fourth quarter of 2008 (Annual Report 2008)

4th Quarter 2008 revenues = $464.2 million

1st Quarter 2009 revenues = $452.9 million

Based on current rates of economic and credit activity in the U.S., we currently expect revenue in the OCIS and Credit Marketing Services lines and in the overall USCIS segment in 2009 to be below levels achieved in 2008. (Annual Report 2008)

management assessment1
Management Assessment

Realizing cost savings from 2009 restructuring

LEAN & Work – Out

14.4MM charge recorded related to headcount reduction and contractual costs

Potential Liability

Entered into put contract with Computer Science Corporation for credit reporting business

$675MM in 2013

Share Repurchase

122MM reserved for 2009

recommendation
Recommendation
  • Triangulated intrinsic value for EFX is $ 33.34
    • DCF Valuation ranges between $28.84 and $31.31
    • Comparables Valuation ranges between $31.31 and $43.98
  • EFX is currently trading at $35.37 as of 4/21
  • Negative correlation with MOS & MCD, but high correlation with AEO & WAG
  • Pursue new vertical markets and expand into emerging markets.
  • Recommendation: Put it on the watch list