Value Investing 101 teaches us that one of the best ways to make money is to buy the stock of fundamentally good companies in trouble. Not surprisingly, many investors will be wondering if this lesson applies to Equifax (NYSE: EFX).
Unless you live under a rock, you have probably heard that Equifax suffered one of the worst security breaches in history. Cyberpirates managed to make away with identity data for 143 million U.S. consumers. To make matters worse, nobody seems to know exactly what was stolen or far the bad guys penetrated into the credit bureau’s systems.
The great hack sent Equifax’s stock price into freefall; back on September 7, EFX was trading at $142.72 a share, by 18 September 2017 it had fallen to $94.47. That’s a price drop of nearly $50 a share – which will undoubtedly pique value hunters’ interest.
Is Equifax a Value Investment?
The security breach might make Equifax a value investment because it still provides a product that almost every American citizen and large company have to use – credit reports. For better or worse, every living person in the United States has to use a credit score sooner or later.
That provides a huge market and a lot of money that can be made charging lenders and others for credit information. Banks, credit unions, car companies, mortgage companies, credit card companies, PayPal and many others will still need credit reports. Somebody will have to provide them, and somebody will still pay for credit reports.
It should be noted here that the true extent of the breach is unknown. There is no evidence that anybody has lost any money or had their reputation destroyed because of the Great Breach. It might turn out to be nothing but media hysteria. Nor does anybody seem to know who the hackers or are what they are doing with the data.
That makes Equifax an intriguing possible value investment if the breach turns out to be hysteria. Somebody might make a lot of money if its’ stock recovers. That means we need to ask the more important question of all: “Is Equifax Making Money?”
Is Equifax Making Money?
The only way to answer that question is to take a look at the last earnings report for Equifax which is what we will do. Here are some of the things that ycharts can tell us about Equifax’s finances:
- Equifax’s revenues have been growing. Equifax reported $3.294 billion in revenues on June 30, 2017. That number was up from $2.873 billion in June 2016. Ycharts data indicates that Equifax revenue has been growing for every quarter since September 2012.
- Equifax is making some money it reported $574.50 million in net income on June 30, 2017.
- Equifax’s net income is growing. It reported $462.80 million in income in June 2016 and $390 million in June 2015.
- Equifax generates some float – it reported a free cash flow of $175.80 million, $826.40 million in cash from operations and $403.90 million in cash and short-term investments on June 30, 2017.
- That float has been growing significantly. Equifax reported $129.30 million in cash and short-term investments on December 31, 2016.
- Equifax retains quite a bit of value; it reported $7.058 billion in assets on June 30, 2017, and an enterprise value of $14.12 billion on 15 September 2017.
- Shareholders made some money from Equifax, it paid a dividend of 39¢ a share on August 23, 2017, and rewarded investors with a return on equity of 20.73% on 30 June 2017.
- That dividend has been growing has been growing. As recently as November 21, 2016, EFX paid a 33¢ dividend.
Why You Should Stay away from Equifax Stock
Equifax has all the characteristics of a neat-little value investment, save one; it is grossly overpriced. My take is that EFX is still overpriced at $94.47 a share and it will drop a lot further.
Investors should stay away from Equifax until it hits $40 or $50 a share. Then it will be a true, although the value is questionable because of the nature of Equifax’s business.
The major products at Equifax credit scores and reports are questionable ones. The idea behind these solutions is to provide a picture of the financial health of an individual or business.
That’s a questionable notion because companies like Equifax can only monitor part of an individual’s financial activity how he pays his bills and what gets reported. The most important financial data of all, how much money a person actually has is not included in a credit report.
Is it the End of Equifax?
A danger for Equifax is that financial institutions stop believing in its product. Some lenders, including car dealers and PayPal (NASDAQ: PYPL) already routinely ignore credit scores. The Great Breach might give major lenders an excuse to join them and dump Equifax’s products.
Other dangers include consumer reaction, which might lead to calls to ban or regulate credit reports. Many Americans already complain about how those ratings are used by landlords and employers.
Politicians sick and tired of being flooded with complaints might decide to pull the plug on Equifax and its competitor; TransUnion (NYSE: TRU). One way Congress can effectively kill credit bureau’s business would be to make them liable for all losses caused by bad information they report. That would lead to massive lawsuits which would bankrupt the credit bureaus.
A major danger for credit unions would be left-wing Democrats gaining control of Congress and pushing through a radical antibusiness agenda. Such an outcome is likely given the level of populist rage at big business; and the success of anti-establishment politicians such as Donald J. Trump and Bernie Sanders, in recent years.
Therefore it would be a smart move for investors to stay away from Equifax. This stock can drop a lot farther, perhaps even to under $10 a share given the right conditions. Stay away from Equifax until we learn the true dimensions of the Great Breach.