Organic growth has been declining for several years at credit checking specialist Experian (EXPN), yet the shares' PE rating is near a five-year high. Even if hopes of a modest growth pick up this year transpire, the shares still look way overvalued to us. We think investors should pull out of the pricey shares, which have recently begun to fall back from a 52-week high.
- High PE ratio
- Exposure to Brazilian weakness
- Currency headwinds
- Weak organic growth
- Reduced net debt
- Good performance in North American credit services
Our table (see below) shows how Experian's organic sales growth rate has weakened over the past five years, dropping from a peak of 15 per cent in 2012 to just 1 per cent last year. Yet priced at 19.4 times Bloomberg consensus broker EPS forecasts for the next 12 months, Experian's shares are rated at close to a five-year high of 20.6 times. And the current multiple is comfortably among the upper 10 per cent of most-expensive ratings achieved by the shares over the past five years. What's more, it looks a very long way down to the five-year rating nadir of 12.6 times forecast earnings.
Declining organic growth
Year to end-Mar | 2011 | 2012 | 2013 | 2014 | 2015 |
---|---|---|---|---|---|
Organic Rev growth rate | 8% | 15% | 10% | 7% | 1% |
Source: Company
Experian's organic growth has run up against a number of obstacles recently. The most pressing difficulties have been encountered by its consumer services business where operating profit was down 11 per cent last year. This has been particularly pronounced in North America, where Experian has been exiting its legacy 'free' brands, which has pulled down margins. The group is trying to switch customers on to paid-for products under the Experian.com umbrella.
While Experian.com enjoyed a 14 per cent rise in revenue during the final quarter of last year, this was not enough to offset weakness elsewhere for the full year, and constant-currency consumer services revenue fell 14 per cent to $717m. The division was also hit by a slowdown in sales by affinity channel partners due to regulatory changes. And the transition away from its legacy products to cross-channel products also hit Experian's marketing services business in the region as traditional email marketing and list processing suffered.
The company is hoping it is at an inflection point where Experian.com growth will start to overshadow legacy business declines, but the issue will not ameliorate over night, even if the group's first-quarter results - due between the time of writing and publication - show an improving trend.
Another big issue facing Experian is Latin America, where it generated 18 per cent of last year's revenues. Macroeconomic conditions in Brazil - accounting for over four-fifths of regional revenue - have depressed Experian's performance and currency falls caused revenue for its largest credit services division to drop 7 per cent to $782m last year.
Admittedly, there are some bright spots for Experian as well as grounds to think it could achieve a pick-up in organic growth towards targets of mid-single digits. Indeed, its North American credit services business has benefited from increasing demand and has also made inroads into new sectors such as healthcare. And in the UK Experian also managed to achieve organic revenue growth across all divisions, increasing its operating profit margin by 130 basis points to 31.4 per cent last year.
EXPERIAN (EXPN) | ||||
---|---|---|---|---|
ORD PRICE: | 1,146p | MARKET VALUE: | £11.2bn | |
TOUCH: | 1,145-1,146p | 12-MONTH HIGH: | 1,264p | LOW: 910p |
DIVIDEND YIELD: | 2.4% | PE RATIO: | 18 | |
NET ASSET VALUE: | 282¢* | NET DEBT: | 115% |
Year to 31 Dec | Turnover ($bn) | Pre-tax profit ($bn)** | Earnings per share (¢)** | Dividend per share (¢) |
---|---|---|---|---|
2013 | 4.65 | 1.19 | 84 | 35 |
2014 | 4.77 | 1.24 | 90 | 38 |
2015 | 4.81 | 1.23 | 93 | 39 |
2016** | 4.80 | 1.22 | 94 | 39 |
2017** | 5.05 | 1.30 | 100 | 42 |
% change | +5 | +6 | +6 | +8 |
Normal market size: 2,000 Matched bargain trading Beta: 0.99 *Includes intangible assets of $6bn, or 617¢ a share £1=$1.54 **JPMorgan forecasts, adjusted PTP and EPS figures |