Last time I ran the numbers on global information services company Experian (LSE: EXPN), back in April, 12 out of 18 brokers were calling it a ‘strong buy’. Clearly, 12 out of 18 brokers can be wrong, because the share price has been all over the place since, and plummeted in the last three months. So why is Experian down 15% since October, and does that make now a buying opportunity?
The trouble began with a poorly-received set of half-year results in early November. Although Experian posted a 3.8% rise in earnings before interest and tax to $608 million, and boasted organic revenue growth in the UK, US, Europe, Latin America, Middle East, Africa and Asia Pacific, the figures were below analyst estimates.
Markets were also sceptical about its $850 million purchase of Passport Health at a pricey seven times forecast sales for 2013. “As a reference, Google is currently trading at 4.63 times sales”, Jefferies International dryly noted. It reckoned EBITDA needs to leap from $30 million to $80 million, just to cover its cost of capital. Then Goldman Sachs stuck the knife in, slashing Experian from ‘neutral’ to ‘sell’.
Brazil proves a tough nut
Experian’s decision to suspend its $500 million share buyback programme in November didn’t help. It has also been struggling with weakness in several of its territories, notably Brazil, and US mortgages. Its January Q3 results did little to shift sentiment, despite 7% total revenue growth. Management expects organic growth in the second half of the year to be at least similar to that in the third quarter.
My worry is that Experian is in the firing line of an emerging market slowdown, particularly in Brazil. Another worry is that when interest rates finally start rising, that will hinder credit growth, reducing demand for the company’s data services. Pressure is already growing on emerging markets to hike rates. Turkey has just blinked, with a whopping hike to protect the lira. Given its global spread, Experian is at the mercy of currency swings.
I feel markets have been a little harsh on Experian, which should benefit from a cyclical recovery in the US, and improving conditions in the UK. But I still wouldn’t want to meet its current valuation of 20 times earnings. Especially since that buys you a yield of just 2%. Forecast earnings per share growth of around 10% for the next couple of years looks good, however, and many brokers remain loyal, notably JP Morgan, Credit Suisse and Deutsche Bank. Can they be wrong again? I will watch this one from the sidelines.
