Experian - much more than just a consumer credit giant

Experian Group Ltd (LON:EXPN), the marketing and credit reference company, used to be part of Great Universal Stores (GUS) and is the first stock that ever made me real money. But it was demerged in 2006, and is now a FTSE 100 company - as is Home Retail Group, its renamed former owner. Though Home Retail Group Plc has higher revenues, Experian Group Ltd has higher profits - and nearly three times higher market capitalisation.

While Experian is best known for its credit reference business, it's a much broader based business than that makes it look. For instance in 2007, it bought Hitwise, one of the major internet measurement companies, and it has a huge position in marketing services, particularly online. It's also involved in decision analytics (which support companies' marketing efforts) and in interactive, for instance with the PriceGrabber website.

The interim results show that credit services, with USD 802m revenue, and a 33.8% margin, remain the major source of earnings [ref] Interim slides http://www.experianplc.com/~/media/Files/E/Experian/pdf/results-and-presentations/2009/hy-fin-rep-18Nov09.pdf [/ref] . Both decision analytics (USD 211m revenue, 27% ebit margin) and interactive (USD 503m revenue, 22.1% margin) also contribute strongly. Marketing services, on the other hand, looks underpowered - though it has USD 341m revenues, its ebit margin at 9.4% is by far the weakest in the group, as its traditional media markets have been extremely weak, though online is doing much better.

The first half results came in ahead of consensus estimates [ref] Investors Chronicle, 18 November 2009: http://www.investorschronicle.co.uk/Companies/ByEvent/Results/Analysis/article/20091118/47d61eca-d435-11de-8eea-00144f2af8e8/Weak-loan-markets-slow-Experian.jsp [/ref] , but this appears mainly to have been the result of management action to slash costs. Margins were maintained, though revenues were down 7 percent. A weak market for credit origination, with fewer loans being applied for, meant fewer credit checks were used, preventing any significant growth in the major business.

However, the company's free cash flow remains impressive, and borrowings were reduced in the period. The subsequent q3 trading update shows a return to revenue growth - albeit only 1% organic. Pricing has remained stable to a few percent down, rather than being savaged, and Latin America in particular has put in a strong performance.

Experian certainly has a number of good points. It's a strongly international business, with over half its revenues coming from North America, and only about 20% in the UK and Ireland - it also has substantial businesses in the emerging markets of Latin America and Asia Pacific.  Experian recently started a joint venture in India, and is strong in Brazil - indeed in 13 it saw its Latin American business growing 18% [ref] Q3 call transcript: http://www.experianplc.com/~/media/Files/E/Experian/pdf/results-and-presentations/2010/Experian_Q3_IMS-transcript.pdf [/ref] .

It has a good spread of business, and has been broadening its product mix, adding new products in most of its divisions over the past couple of years. It has also concentrated on increasing the amount of business outside the financial sector, which now accounts for only 41% of its business, with 18% direct to consumer [ref] interim presentation [/ref] - selling to telecoms, utilities, automotive, insurance and media. It's now pursuing new opportunities that have arisen as a result of the credit crunch and regulatory change - for instance it expects to see more business from stress testing of banks' credit books, and income modelling, as well as potential opportunities in capital markets.  Experian also recently launched protectmyID, a new product aimed at high net worth individuals who wish to ensure they are protected from identity theft.

However, on the negative side, earnings appear to be stagnating, and I'm concerned that if we get a double-dip recession, there may not be any room for further cost cuts to maintain margins in a nil revenue growth environment. The other thing that worries me is the fact that every single director deal for the six months seems to have been a sell. That really doesn't look good. Perhaps it reflects the fact that they have a more accurate view of exactly how much the banks are lending, and just how creditworthy (or not) their debtors are - but it certainly doesn't suggest there is hidden value in the shares right now.