The UK stock market has seen something of an exodus of companies over the last couple of years. But investors looking for top-tier companies to buy shares in still have plenty to choose from.
Experian (LSE:EXPN) is one of them. By pretty much any standard, it’s a world-class company and today’s (15 July) trading update underlines its dominant position.
Results
Experian might be a FTSE 100 stock, but its largest market is the US, accounting for 67% of revenues. And today’s update reported strong growth in this area.
US revenues grew 10% (9% on an organic basis) which is both (i) impressive and (ii) an improvement on the 8% the company reported in its previous update. That’s a good result.
Experian has a strong position in the US, but its most attractive growth prospects are arguably elsewhere. In particular, the firm has been working to build out its presence in Latin America.
Sales growth in the region came in at 5%, which looks disappointing. But investors should note that this was partly due to currency fluctuations – adjusting for this, the increase was 17%.
Management highlighted macroeconomic volatility and persistently high interest rates as ongoing challenges. And even outside Brazil, these are the main risks with Experian as an investment.
Like anything else, demand for mortgages that require Experian credit checks falls when they’re more expensive. So while interest rates are expected to come down, investors need to keep an eye on this both in the US and elsewhere.
Quality
Experian’s status as a world-class business is underpinned by two things. One is the barriers to entry that limit competition and the other is the value its products provide its customers.
In terms of barriers to entry, the firm collects information from hundreds of sources. They provide this data because they ultimately hope to benefit from the collective sharing of knowledge.
It would be hard — if not impossible — for a new operation to get started with this. Without an existing database, there’s no incentive for anyone to provide information, making it hard to compete.
In terms of value, the latest data suggests the average new mortgage in the US has a value of $432,000. And a single credit report from Experian costs $30 at the most.
That’s less than 0.007% of the value of the mortgage. In other words, it gives lenders a chance to reduce their risk with a large asset in a significant way for a very low price.
This is why Experian is widely acknowledged as one of the UK stock market’s world-class companies. And I expect this to remain that way for some time.
Foolish conclusion
Over the last 10 years, Experian has been steadily growing its earnings and free cash flow. But at an (adjusted) price-to-earnings (P/E) ratio of 33, investors should be looking for more than steady.
Double-digit revenue growth in the US, however, is a very encouraging sign. And I don’t think currency fluctuations should entirely disguise a strong underlying performance in Latin America.
There’s no question the stock looks expensive and a better entry point would be nice. But for anyone with a long-term view, I think it’s worth considering even at today’s prices.
