If you’re looking for a cyclical stock that will see better performance in an improving economy, look no further than Equifax Inc (NYSE: EFX). The Atlanta-based credit report company helps consumers track their credit scores. It also has a business division that helps corporations track consumer credit issues and a mortgage business that provides lenders with consumer credit information.
On Sept. 19, Andre Benjamin, an analyst with Goldman Sachs, initiated coverage on the stock with a buy rating. The company, which has operations around the world, should make money as global consumer spending increases, he says. Why? Because people will want to check their credit scores before buying big purchases like cars and houses.
He expects the company’s online consumer products division, which is where personal credit reports fall under and accounts for about 70% of revenues, to grow between 5% and 8% in fiscal years 2014 and 2015.
Daniel Perlin, an analyst with RBC Capital Markets, is also bullish on the business. In a July 25 note, he wrote that he believes the company is “well positioned to outperform in a more pro-cyclical consumer environment.”
There is one thing to watch: a slow down in its mortgage business. As the U.S. housing market has picked up, this part of the company’s operations has done well. However, the company has said that growth in its mortgage business will slow in the coming year. If it slows too much, though, the earnings could underperform.
The hope is that growth in other parts of its business will balance out lower mortgage revenues, says Perlin.
Its international business should also grow by around 6% every year for the next three fiscal years, says Benjamin. Latin America will provide the most growth, while their European business should grow by about 3% this year.
He also expects to see its “Verification Services” division to post between 10% and 15% growth. This part of the business helps authenticate individuals for businesses worried about fraud. It should see pickup from auto and credit card companies, consumer loan operations and Medicare and Medicade service companies.
In terms of valuations, it’s trading at a discount to the group. Investors can buy it for about 10.5 times EV/EBITDA, compared to 12.2 times for its peers. Part of the reason for the cheaper valuation is “below average recurring revenue and pricing power,” writes Benjamin.
As the economy improves, though, those numbers will move higher. The stock price is currently at $61, but Perlin thinks it can hit $67 over the next 12 months, while Benjamin has a $70 price target on the stock.