Can Experian's (LSE: EXPN) growth continue and are the shares cheap?
Capital appreciation is surely the goal of many investors. One method of achieving that is to buy companies with steady earnings growth. If bought when the shares are cheap, two drivers could move the share price up:
- growth in earnings, and
- an upwards P/E re-rating.
Highly successful fund manager Peter Lynch classified steady growers as 'Stalwarts', which he typically traded for 20% to 50% share-price gains. But whether buying for gains like that or holding for the longer term, we need to know if reliable earnings growth can continue, and whether the shares are cheap.
Seeking durable growth
Not all companies achieve stable growth, as you can see by the aggregate performance of those in London's premier FTSE 100 index (UKX), where the compound annual earnings-growth rate has been just 0.7% over the last five years:
|Year to June||2007||2008||2009||2010||2011||2012|
|FTSE 100 index||6,608||5,626||4,249||4,917||5,946||5,571|
|Aggregate earnings per share||537||503||427||397||527||557|
Consistent, cash flow-backed growth in profits is a promising characteristic in today's markets so, for this series, I'm examining firms with annual earnings growth between 4% and 20%.
One contender is Experian (LSE: EXPN), which is, perhaps, best known for its credit-checking services. This table summarises the company's recent financial record:
|Adjusted earnings per share||57.5 cents||62.3c||63.7c||66.9c||78.9c|
So, earnings have grown at an equivalent 8.2% compound annual growth rate, putting Experian in the Stalwart category.
Experian describes itself as the leading global information services company, providing data and analytical tools to clients around the world. The company employs 17,000 people through offices in more than 44 countries. That said, it derives the largest portion of its revenues from North America at 47%. Brazil provides a further 20%, the UK 18% and the remaining 15% comes from other countries around the world.
After spinning from the GUS group in 2006, Experian has grown its operations in breadth and depth. Of its four principle service categories, Credit Services is the biggest contributor to the company's revenues posting 47% last year. Marketing Services contributed 21%, Consumer Services, 21% and Decision Analytics 11%.
According to today's half-year report, recent trading has been good and it seems that further earnings growth is on the cards going forward.
Experian's earnings growth and value score
I analyse five indicators to determine whether earnings growth can continue and if the shares offer good value:
1. Growth: revenue, earnings and cash flow have all been growing steadily. 5/5
2. Level of debt: net gearing is about 80% with borrowings around 2.8 times earnings. 3/5
3. Outlook and current trading: good recent trading and a cautiously positive outlook. 4/5
4. Enterprise value to free cash flow: a trailing 21 and above historic growth rates. 2/5
5. Price to earnings: also a trailing 21-or-so and above historic growth rates. 2/5
Overall, I score Experian 16 out of 25, which encourages me to believe this stalwart can continue earnings growth that outpaces that of the wider FTSE 100. Compared to the FTSE's price-to-earnings (P/E) ratio of around 11 and the firm's growth predictions, the shares seem to price the company's prospects fully.
It seems investors haven't overlooked steady growth in all the firm's desirable metrics. The valuation indicators drag the overall score suggesting a fully priced company.
Right now, forecast earning growth is 15% for year ending in March 2014, and the forward P/E ratio is around 17 with the shares at 1,055p. Considering that and the other factors analysed in this article, I think that Experian can stay on my watch list, for now.
Experian is one of several steady-earnings-growing stalwarts on the London stock exchange, each with the potential to deliver significant capital appreciation when purchased at sensible prices.
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> Kevin does not own any shares mentioned in this article.