This FTSE 100 stock has what it takes to keep beating the market

Stephen Wright looks at a UK stock that’s outperformed the broader market since its IPO in 2006 and looks set to keep doing so with the emergence of AI.

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Since listing on the stock market in 2006, Experian (LSE:EXPN) shares are up 464%. During that time, the FTSE 100 has gained 32%. 

I think the UK credit bureau is likely to continue its outperformance. And there are some important lessons for investors to learn from its past success.

A resilient business

Experian provides data and analytics to lenders that help them assess potential borrowers. While it’s listed on the UK stock market, around 66% of its revenues come from the United States. 

The last five years should have been a real challenge for the company. Interest rates in the US have increased from 2.5% to 5.5%, making borrowing more expensive and mortgages less affordable.

Despite this, Experian has managed to keep moving forward. Revenues have increased 10% a year and operating income’s grown from £753m to £1.05bn. 

As a result, the stock’s gone from £22.16 to £32.25 – a 45% increase. The FTSE 100, by contrast, has gained 10% over the same period.

Competitive advantage

There are several things that make Experian an unusually good business, but the most important is the data it is able to draw on. Collected from a huge range of sources, it forms a high barrier to entry.

Wherever there’s a significant amount of data, there’s inevitably a risk of a data breach. And this happened with Equifax – another credit bureau – back in 2017.

It’s impossible to rule out something similar happening with Experian in the future. But it’s worth noting that data has moved on significantly since then.

Experian’s data isn’t just important for informing its credit scores. The rise of artificial intelligence (AI) makes it an extremely valuable asset to own.

An important lesson

Experian’s recent success illustrates an important point. Buying any stock at a price-to-earnings (P/E) ratio of 35 is a risk, but investors should be careful in this case before they let that put them off.

Five years ago, the stock traded at a P/E ratio of 38. And since then, the shares have outperformed the FTSE 100 and have never fallen below 24 times earnings.

Experian P/E ratio 2019-24


Created at TradingView

I’m not saying the high multiple isn’t a risk – it absolutely is. But investors who decided against buying the stock in 2019 on this basis would have missed out on some market-beating returns.

This illustrates a familiar point that Warren Buffett makes. When it comes to stocks, the quality of the underlying business – rather than the price – is the most important thing.  

Should investors buy Experian shares?

There’s a good case for thinking Experian shares can continue to outperform the FTSE 100 going forward. It’s no easier to disrupt the company’s business now than it was five years ago. 

Furthermore, AI’s likely to boost demand for data over the next few years. Experian has produced great results for investors, but I wouldn’t be surprised if the stock’s best days are ahead of it.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Experian Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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