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Why I’d consider this FTSE 100 giant over Experian

Providing a Q1 trading update to the market this morning was global information services company Experian (LSE: EXPN).

While the FTSE 100 constituent’s numbers looked fairly decent, I can’t say I’m tempted by the stock. Let me explain why.

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Quality… but at a price

Although no actual monetary values were given, the company achieved total revenue growth of 10% at constant exchange rates over the reporting period. Organic revenue growth came in at 8%. 

Registering 13% total revenue growth, Experian’s operations in North America did particularly well, although this was boosted by the acquisition of Clarity Services. At 11%, the company’s performance in EMEA/Asia Pacific markets was also more than adequate. 

In contrast to this, performance in Latin America was less strong with total revenue growth of 4% at constant currency as a result of industrial action and “reduced contribution from counter-cyclical revenues.” The same level of revenue growth was recorded in the UK and Ireland following the acquisition of FinTech firm Runpath. 

Over the past year, the credit data company’s share price has gained 21%. When you consider that the FTSE 100 has only climbed by less than 4%, that’s a pretty decent return by most investors’ standards.

The flip-side to this kind of performance, however, is that Experian’s shares now trade on almost 25 times forecast earnings for the current financial year. While it may be argued that this can be justified by the fact that the company should continue to generate solid profits regardless of the economic climate (credit checks will be needed in good times and bad), the rather muted reaction to today’s numbers from the market suggests that much of Experian’s defensive qualities and growth potential are already priced in. 

Experian may be a quality business but I suspect the upside from here will be more limited.

A better bet?

One option I’d pick over Experian would be Paddy Power Betfair (LSE: PPB). Shares in the gambling behemoth have been rather volatile of late after the company disappointed the market with its last update in May.

Revenue over the three months to the end of March came in flat (in constant currency) as the company wrestled with a high number of racing cancellations and reduced customer activity as a result of “a sustained period of bookmaker-friendly sports results.” Q1 earnings fell 6% in constant currency as a result of new betting taxes and start-up losses from the company’s operations in the US.

Despite this (and the incredibly competitive market in which it operates), I’m positive on Paddy’s future, both in the short and long term. The company will surely have benefited from England’s surprisingly decent run in the World Cup and the recent good weather is also likely to have increased interest in the sporting calendar in general. Add to this the potentially massive opportunities for the company in the US following the relaxation of gambling laws and the investment case begins to look compelling in my view.

At 20 times expected earnings (reducing to 18 in 2019), Paddy Power Betfair’s shares look attractively priced compared to those of Experian. Next year’s PEG ratio of 1.1 suggests this is great value given the company’s outlook. And the 2.5% yield, while small relative to that offered by some in the FTSE 100, is still decent for a growth-focused stock.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Experian. 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.