3 Reasons to Sell EFX and 1 Stock to Buy Instead

Over the last six months, Equifax’s shares have sunk to $226.96, producing a disappointing 12.9% loss - a stark contrast to the S&P 500’s 10.4% gain. This may have investors wondering how to approach the situation.

Is there a buying opportunity in Equifax, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Equifax Not Exciting?

Despite the more favorable entry price, we're swiping left on Equifax for now. Here are three reasons there are better opportunities than EFX and a stock we'd rather own.

1. Shrinking Adjusted Operating Margin

Adjusted operating margin is a key measure of profitability. Think of it as net income (the bottom line) excluding the impact of non-recurring expenses, taxes, and interest on debt - metrics less connected to business fundamentals.

Analyzing the trend in its profitability, Equifax’s adjusted operating margin decreased by 5.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 20.6%.

2. EPS Barely Growing

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Equifax’s EPS grew at a weak 3.7% compounded annual growth rate over the last five years, lower than its 8.7% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Equifax’s ROIC averaged 2.3 percentage point decreases over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Equifax isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 26.1× forward P/E (or $226.96 per share). Investors with a higher risk tolerance might like the company, but we think the potential downside is too great. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward one of our all-time favorite software stocks.

Stocks We Would Buy Instead of Equifax

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