Shareholders of Equifax would probably like to forget the past six months even happened. The stock dropped 25.8% and now trades at $158.71. This may have investors wondering how to approach the situation.
Is now the time to buy Equifax, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is Equifax Not Exciting?
Even with the cheaper entry price, we’re cautious about Equifax. Here are three reasons why EFX doesn’t excite us, plus one stock we’d rather own.
1. Shrinking Adjusted Operating Margin
Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Analyzing the trend in its profitability, Equifax’s adjusted operating margin decreased by 3.9 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 20.1%.
2. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Equifax’s EPS grew at a weak 1.4% compounded annual growth rate over the last five years, lower than its 7.5% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
3. New Investments Aren’t Moving the Needle
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Uneventfully, Equifax’s ROIC has stayed the same over the last few years. Given the company’s underwhelming financial performance in other areas, we’d like to see its returns improve before recommending the stock.
Final Judgment
Equifax isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 17.8× forward P/E (or $158.71 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re fairly confident there are better stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.
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