Hello nnr81,
Thank you for your interesting question. To show whether Experian is a
good buy or not, I've done an analysis in SWOT form (strengths,
weaknesses, opportunities, threats.)
-----------------
Strengths--
1. Diversification
Experian operates in 60 countries. They are not simply a credit
bureau, but they are well placed in four avenues of revenue: credit
(47%), marketing (25%), outsourcing (8%) and interactive(20%). This
broad range of endeavours makes it well-suited in case a downturn
should occur in any of these markets.
2. Market leader in the UK
While Experian has two major competitors in the US, in the UK it has
little competition besides local companies and is the clear market
leader. Because of this, however, it is not as well-known in the UK as
it is in the US.
3. Lead with consumers
Experian sells more credit reports directly to consumers than do
Equifax or TransUnion.
4. Smartly chosen acquired products
Experian has grown organically by buying companies and products that
fit with it and enhance Experian's already-existing products. One such
product is Hunter II, a fraud-detection system which has helped
business. Fraud detection systems are used more and more by financial
institutions to prevent criminals from stealing from their clients'
accounts, and as credit card use and credit card fraud both grow more
rampant, this is a great area to get into.
5. Growth
Sales were up 27% and profit up 29% for 2006. It was the fourth
consecutive year that the company has had double digit sales and
profit growth. Shares grew 21 percent in the five years from 2001 to
March 2006. The total shareholder return for the average FTSE 100
company was one percent over the same time period. The demerger with
GUS allowed Experian to offer more stocks and raise £900m in capital
that it hopes to continue expanding with. It will now probably enter
the FTSE 100 on the LSE.
6. Multiyear contracts with huge companies
Experian has signed multiyear, multimillion dollar contracts with Bank
of America, HSBC, Limited Brands in the US, and BSkyB, among many
others.
7. The Debt Economy
As more and more people in the US, UK and pretty much everywhere else
continue to not save and spend on credit cards instead, Experian will
have a great business. Not only do they check credit scores, but they
extend credit themselves (with 6 billion mailed offers last year) and
recommend different credit card options to consumers.
-----------------
Weaknesses--
1. End of the housing boom and the credit cycle
Experian is mostly known as a credit bureau and does 47 percent of its
business in this arena. However, as the housing boom ends, people
might be buying less adn borrowing less for mortgages, which could
affect their business. These fears especially hold true in the US,
where it does most of its business.
2. Too much too fast?
In 2006, Experian spent more money purchasing businesses than it ever
has before, about £775 million worth. They may be acquiring too many
side businesses too quickly. Is lowermybills.com really worth $330
million? Is pricegrabber.com worth the $485 million that Experian paid
for it last year?
3. Large scale credit processing the UK unprofitable
Experian has announced that this segment of their business is entirely
unprofitable and they will quit it. However, they won't be out of it
completely until 2009, so until then, it will be an unprofitable
tagalong to the rest of their business.
4. Security
To get credit, one must be checked by a credit bureau. Since most
Americans and Brits have gotten credit at some point, there's a large
chance that their information is stored in a computer owned by
Experian. The huge amount of data that this company has on consumers
worldwide is not equaled by many companies. The expense to keep up
security to prevent a breach that would allow consumers' private
information to get in the wrong hands is vast. Even one security
breach could severely affect businesses' confidence in Experian and
could have huge effect on profits.
5. US Laws.
The US mandated starting in 2005 that consumers could acquire copies
of their credit reports each year from each of the three credit
bureaus. To do this, Experian had to set up a website on which
consumers can register and they have to provide a report to all the
Americans who ask. This costs them a lot of money. They also have lost
business of private consumers, who will be less likely to pay for a
credit report when they can get one for free. In addition, the
Sarbanes-Oxley regulations require Experian to regulate their
accounting and costs huge amounts of money each year to put in place.
6. Listing on the LSE rather than in NYC.
Experian does most of its business in the US. Why, then, does it list
itself on the London Stock Exchange rather than the New York Stock
Exchange? It would do better and garner a higher rating in the US. It
is a British firm and apparently wants to remain loyal to its roots.
This might be at the expense of shareholders, however, if its stocks
suffer as a result.
-----------------
Opportunities--
1. Emerging markets
Experian is making headway in new and emerging markets, such as the
Asian Pacific part of the world and Eastern Europe. Most Chinese
people don't have credit cards, but they are modernizing as the years
go by. As more and more Eastern European countries join the EU and
modernise, they will begin using credit cards and credit in general
more and Experian could find some very exciting marketing
opportunities in this part of the world. In addition, Experian has
already established a base of business clients in its current locales;
when those companies expand to other markets, they'll most likely
appreciate that Experian is available there as well.
Experian has also taken the time to develop the first consumer
classification system covering China, dividing the Chinese population
into 34 buying types. Ventures such as this are important as China
becomes more of a consumer economy, and it's a great sign that
Experian is willing to take the lead in marketing to consumers there.
2. Identity theft.
Oddly enough, this phenomenon works both for and against Experian.
They have to worry about securing their data, but they also gain more
business from scared consumers who believe their identities have been
stolen. They used to get 97 percent of their business from people who
had been turned down for loans; now they get 50 percent of their
business from folks afraid that their identity has been stolen.
---------------
Threats--
1. US competition
Experian has three competitors in the US sector: Dunn and Bradstreet,
which is primarily for businesses, and TransUnion and Equifax in the
consumer sector. The factors affecting the competition include:
price
product quality
customer service
technological innovation
2. Client consolidation
More and more businesses are merging and acquiring each other these
days, and that could hurt Experian. When two clients become one
client, Experian makes less money. Also, when a client becomes bigger,
they become better able to negotitate on price and overall prices in
the credit reporting industry might go down as a result.
3. Lawsuits
Class action lawsuits are a way of life in the US, and for businesses,
so are laywers to defend themselves. Legal fees can mount fast and can
cost huge amounts of money. Experian has to maintain a group of
lawyers to defend itself from this threat.
-----------------
My Recommendations.
I believe that Experian is a strong stock. It suffers from two major
weaknesses: it may be British in origin, but right now it is basically
mostly an American company. Yet, it lists in London. This hurts its
share prices because it's not as known in the UK as it is in the US. I
don't see anything major happening to hurt it, because it's in such a
neverending business-- everyone has a credit card/credit score/credit
report. The only thing that could harm it is undervaluing in Britain
and also if it ever has any type of security breach whatsoever. People
are very protective of their personal data and will not trust a
company that lets that leak.
It comes down to one question: Will the downturn in the credit cycle
hurt this business? I think that everyone will always use credit
cards, and when the economy is bad, I think that's even more true. I
don't think that it will have a great effect on Experian's business.
Overall, I say that you should go for it. It had a 21 percent increase
over the last five years. That was in the wake of the housing boom,
but it should still do quite well. (Five years ago would have been the
best time to have bought it, of course.)
There is an article I've linked to from the Financial Times which is
mostly subscriber-only; you may want to start a trial subscription or
check out a library database to read this article. The Financial Times
recommends that GUS shareholders buy into Experian near the end of it.
Sources:
Experian Annual Review
http://www.experian.co.uk/downloads/corporate/annualReview2006.pdf
Financial Times
"Gaining Experian"
By ANDREW HILL
Published: September 15 2006
https://registration.ft.com/registration/barrier?referer=http://search.ft.com/searchResults?queryText=experian&x=0&y=0&javascriptEnabled=true&location=http%3A//www.ft.com/cms/s/0f33e2cc-4456-11db-8965-0000779e2340.html
The Economist
"Buttonwood: Debt puts on its dancing shoes"
June 20, 2006
http://www.economist.com/agenda/displaystory.cfm?story_id=E1_SDSJVJR
The Economist
"Your money and your life"
Jun 2nd 2005
http://www.economist.com/world/britain/displaystory.cfm?story_id=E1_QDPPQVR
Search terms:
experian gus
site:ft.com experian
site:economist.com experian
If you need any additional clarification of my answer, let me know and
I'll be glad to help.
--keystroke-ga |
