Cloud Transformation Will Enable New AI-Driven Products And Partnerships

Key Takeaways

• Equifax's cloud transformation and AI-driven innovation are set to drive revenue growth through new, differentiated services and higher-margin revenue streams.
  
• Strategic acquisitions, partnerships, and a share repurchase program aim to accelerate cash flow, strengthen earnings, and boost shareholder returns.
  
• The company's dependency on declining markets, foreign exchange risks, and high pricing limits revenue growth and market share despite cloud initiatives.

Catalysts

Operates as a data, analytics, and technology company.

• Equifax's migration to its New Equifax Cloud positions the company for growth, innovation, and new AI-driven products, potentially boosting revenue through differentiated services.
  
• EFX 2027 strategic priorities, including targeted bolt-on acquisitions and completion of the cloud transformation, are expected to accelerate free cash flow generation and strengthen earnings.
  
• The multiyear share repurchase program planned for 2025 aims to return capital to shareholders, potentially driving EPS growth.
  
• New partnerships and significant record growth in EWS Verification Services, especially with companies like Workday, are anticipated to fuel revenue growth in 2025 and beyond.
  
• Continued product innovation, leveraging Equifax Cloud capabilities and EFX.AI to deliver new solutions, is expected to drive higher margins by increasing higher-margin revenue streams.

Equifax Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Equifax's revenue will grow by 9.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.6% today to 17.1% in 3 years time.
• Analysts expect earnings to reach $1.3 billion (and earnings per share of $10.44) by about April 2028, up from $604.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.4 billion in earnings, and the most bearish expecting $1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.8x on those 2028 earnings, down from 42.2x today. This future PE is greater than the current PE for the US Professional Services industry at 19.8x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.71%, as per the Simply Wall St company report.

Equifax Future Earnings Per Share Growth

Risks

• The company's growth is heavily dependent on the U.S. mortgage and hiring markets, which are currently experiencing declines, leading to a lower revenue growth forecast. (Impact: Revenue, Earnings)
  
• There is a significant risk related to foreign exchange impacts, which could negatively affect international revenue, as the strengthening U.S. dollar reduces revenue generated in foreign currencies. (Impact: Revenue, Earnings)
  
• High pricing in mortgage credit reports may lead to shifts in lender behaviors, such as using fewer credit bureaus or soft pulls, which could impact the company's market share and revenue from this segment. (Impact: Revenue)
  
• Decreases in government funding and changes in funding practices, such as CMS reducing reimbursement rates, could affect revenue growth in government sectors. (Impact: Revenue, Net Margins)
  
• Despite cloud initiatives, the expected margin expansion is lower than previously anticipated, potentially due to unexpected costs or slower cost reductions impacting overall profitability. (Impact: Net Margins, Earnings)

Valuation

• The analysts have a consensus price target of $284.216 for Equifax based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $315.11, and the most bearish reporting a price target of just $250.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.5 billion, earnings will come to $1.3 billion, and it would be trading on a PE ratio of 33.8x, assuming you use a discount rate of 6.7%.
• Given the current share price of $205.5, the analyst price target of $284.22 is 27.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.