Tag: Grant

Investing in Equifax – A Struggle Between A Great Business Model vs. Personal Ethics

Recently, I had become interested in Equifax (EFX) as it has popped up on my value investing radar as a good company at a discount price.

The main reason why this company has recently been selling at a discount price is because of its massive security breach.

I did a preliminary analysis on the company and here is a summary of my findings:

Equifax’s Strange History

The history of the company is quite interesting and a bit creepy. It was started in 1898 by two brothers that were grocers in Chattanooga, Tennessee. They would keep track of the grocery store’s customers’ ability to pay (aka: credit worthiness). Then this grocer began selling the info about his customers to other stores.

Soon the grocer was selling this info to anyone he could, including retails stores and insurance companies. The creepy part is that they weren’t just collecting financial info about being credit worthy, they also were collecting all info that they could such as love life, character, morals, religion, and any rumors they could dig up. They even referred to this questionable information as “moral hazard” information – according to fundinguniverse.com. 

The March 1970 pages of the New York Times included details about how reports from the Equifax company (formerly Retail Credit company) could include “facts, statistics, inaccuracies and rumors” about almost every part of a person’s life. Not only info about education and job history, but also very personal info about marital troubles and sex lives. Then companies could deny credit to customers because of “moral lacking” as supposedly proven by this invasion of privacy upon its unknowing customers.

At one point, employees of this company were even being paid bonuses for the worst dirt they could find on these customers.

Also in 1970, the Fair Credit Reporting Act helped to prevent Equifax from gathering most of this non-financial and questionable personal info.

But the very idea of Equifax having a history like this partly turned me off to this company. In addition, I feel that most residents of USA have no choice but to be included in this company’s database and unwillingly, Equifax is given a great deal of private info and control over our lives.

Prior to this security breach, I had considered Equifax to be a trusted authority about creditworthiness. After the breach, and following a bit of research about the company’s history, I have a different view of the company. When I really stopped to think about this company, I’m shocked that it can even exist.

Imagine any other company that is legally allowed to freely obtain your social security number, birthdate, financial history, etc. without your permission. Then they are able to decide your fate and control your life in such a way that their decisions determine whether you will be able to get loans to buy a house, a car, to have a credit card, and to determine how much money you will have to pay for these items for the foreseeable future. Shockingly, this company is allowed to exist.

Equifax’s Monopoly-like Business

This automatic inclusion and Equifax’s monopoly that it shares with the 2 other main credit reporting agencies could be a big plus for it being a good business model to invest in since it prevents competition.

Plus, their customer base keeps expanding regardless of whether people actually want to do business with this company.

So on one hand, Equifax could be a great company to invest in for its business model, on the other hand this company could be ethically questionable for some investors to consider.

Moving Onto Equifax’s Fundamentals

The past 10 years of data shows decent numbers, but when you look at the past 5 years, the numbers dramatically improve. This is a good sign and it shows that the company have been getting fundamentally stronger.

In addition to becoming stronger, Equifax has also become more consistent over the most recent 5 years. Earnings used to be more inconsistent from 10 years ago to 6 years ago, but the past 5 years have been growing much more consistently.

Equifax’s most recent 5 years of earnings are showing more consistent growth than the previous 5 years. This is further proof that this company could be a potentially safe and consistent company to invest in. 
Source: http://www.beatthemarketanalyzer.com

Equifax’s growth rates in the above chart show that there has been increased growth across the board in the past 5 years with regards to: revenue, earnings, cash flow, and book value. This is all positive news for anyone wanting to invest in Equifax.
Source: https://www.gurufocus.com/financials/EFX

On the downside, Equifax’s current ratio is less than one, which could signify that it doesn’t have much assets to cover its liabilities.

While Equifax has decent debt-to-equity, the current ratio is subpar.
Source: http://www.beatthemarketanalyzer.com

The Leadership Of Equifax Put Into Question

Also, I learned a bit about the CEO Rick Smith, and after watching his apology video, he doesn’t seem very genuine in my opinion:
Rick Smith, Chairman and CEO of Equifax, on Cybersecurity Incident Involving Consumer Data.

You can draw your own conclusions. To his credit, according to surveys done by glassdoor.com, over 80% of Equifax employees approve of the CEO. So depending on the validity of these surveys, that could be a plus for Rick Smith and his leadership in the company.

Time will tell how Equifax and its leadership will recover from this major security breach.

Deciding To Invest In Equifax Could Be a Struggle Between A Great Business Model Vs. Personal Ethics

In conclusion, I’m passing on this company because of a weak current ratio, a lack of conviction about the leadership and the concept of the company itself and it’s ethics. But there are good reasons for some people to invest in this company, such as: decent long term fundamentals and strong and consistent recent 5 year fundamentals, a monopoly-like business model, which prevents competition and has an expanding customer base with massive amounts of control of its customers and the economy of the USA.

Additionally, Equifax is currently selling at a discounted price because of the pessimism surrounding the security breach.

If you have opinions about Equifax, I’d love to hear your comments.