When defensive stocks are mentioned, it usually conjures up the image of utilities, consumer goods stocks and pharmaceuticals, but in the 21st century, this list has one more constituent: data. Data is fast becoming the world’s most valuable commodity. Whoever has the most comprehensive and expansive data sets has all the power.
Companies such as Google, Facebook, and IBM know the value of data and have spent years collecting information to offer to customers as well as helping produce more tailored products. The data these companies have gives them a huge competitive advantage over peers.
The more data, the better. Data sets take time to put together, so they can’t be replicated overnight. This is why Google dominates the online search and advertising market. The sheer volume of data the firm has collected over the years puts it head and shoulders above competitors.
Competitive advantage
Just as Google dominates the online search business through data, Experian (LSE: EXPN) dominates the business of credit ratings.
In today’s world credit ratings are an essential tool for banks and lending institutions around the world. Experian is one of the most established providers of credit ratings. As the company has been working on its business and refining its data sets for years, it’s virtually unrivalled in the industry.
Today’s trading update from the company affirms this view. Experian’s profit before tax rose 14% to $520m in the six months ended September 30. For the first half, organic revenue growth came in at 5%, well within the company’s target range. For the full year, management is forecasting mid-single-digit organic revenue growth at constant currencies. Data services drove most of the revenue growth during the period. Management highlighted strong growth in the firm’s credit services and decision analytics units.
As Experian has virtually no competitors, the company has total control over its pricing, allowing management to maintain fat profit margins. For the first half, the group reported earnings before interest and tax margin of 25.7% and cash flow from operations totalled $590m, all of which was ploughed back into operations to fuel growth.
Unfortunately, shares in Experian aren’t cheap. The market has cottoned on to the fact that the company is one-of-a-kind and therefore investors are willing to pay a premium to get their hands on the shares.
Still, when it comes to defensive stocks, Experian looks cheap compared to others that come under that heading. Specifically, shares in Experian currently trade at a forward P/E of 20.4 compared to, say, Reckitt Benckiser‘s valuation of 23.5 times forward earnings. Also, there’s an argument to be made that Experian should trade at a premium to the market due to the company’s competitive advantage or to use Warren Buffett’s phrase “wide moat”.
The bottom line
So all in all, Experian’s position in the credit ratings market makes the company one of London’s most defensive stocks and as the world becomes more dependent on credit, demand for its services will only grow.
