Equifax: A Potential Interest Rate Cut Beneficiary (NYSE:EFX)

I upgraded to Equifax (NYSE: EFX) from “Buy” to “Strong Buy” in my previous coverage published in April 2024, anticipating an upgrade in the mortgage business as well as strong growth momentum in the non-mortgage business. The company generated 8% organic revenue growth with 13% growth in non-mortgage business Q2 FY24. It’s impressive for the company to deliver 4% growth in US mortgage revenue despite a 13% drop in mortgage applications. I anticipate the mortgage business to continue to recover and the non-mortgage business to sustain the growth momentum. I reiterate a “Strong Buy” rating with a one-year price target of $360 per share.

The best interest rate reduction game

In Q2, Equifax posted 8% organic revenue growth, with 13% growth in non-mortgage business, as shown in the chart below.

Fed is is likely to cut interest rates in September, and now is the time for investors to consider companies that can benefit from lower interest rates. I consider Equifax to be one of the top performers amid a falling interest rate cycle. Key reasons include:

• During the period of rising interest rates, US mortgage applications fell 7.5% in 2021, followed by a sharp decline of 37% in 2022 and 34% in 2023, as shown in the slide below . Equifax expects overall mortgage applications to fall 11% in 2024, assuming no change in interest rates. Even without interest rate cuts, the credit demand market has already started to stabilize; after all, some mortgage refinancing application is non-discretionary.

• As I indicated in my previous article, the workforce business is Equifax’s most important growth driver. Workforce Solutions grew 5% in Q2, with a 12% increase in non-mortgage revenue offset by a 12% decline in mortgage revenue. As we enter the rate cut cycle, I anticipate that the mortgage component will begin to recover. Mortgages account for about 25% of total labor income and are quite interest rate sensitive. As such, Workforce Solutions revenue growth is likely to accelerate in FY25.
• Finally, when the Fed begins to lower interest rates, I anticipate that the labor market will gradually begin to recover. As mentioned in my previous coverage, Equifax offers employment verification services and has the largest database of employment and income data. An improving labor market could benefit their workforce solutions business.

Growth projection and DCF update

Equifax is targeting revenue growth of around 9% for FY24 as follows:

I calculate that Equifax will deliver 9.1% revenue growth in FY24, then accelerate to 10.2% starting in FY25. Key assumptions include:

• US Consumer: I anticipate the segment to grow 10% in FY24, driven by accelerated non-mortgage growth. During the earnings call, Equifax revealed that the company has completed its migration to the cloud for its US consumer business. Migrating to the cloud will help Equifax customers make better use of Equifax’s credit application servers. Starting in FY25, I anticipate that the US consumer will grow by 8%, in line with the growth rate in a normalized interest rate environment.
• International: I anticipate the growth momentum to be sustained for the foreseeable future, growing at 10% annually. Equifax has invested in their B2B consumer/commercial solution as well as data analytics for their international market. These value-added services will help the company sustain double-digit revenue growth in the near future.
• Labour: We forecast the segment to grow by 8% in FY24, then accelerate to 12% from FY25, mainly driven by the anticipated interest rate cut. As discussed earlier, I anticipate the Fed will begin cutting interest rates in September and Equifax’s workforce solutions will benefit significantly from FY25 onwards.

As for the edge, there are several factors to consider:

• Equifax has already completed infrastructure upgrades and investments in recent years. They have successfully migrated most of the services to the cloud infrastructure. Therefore, depreciation costs are likely to decrease in the future.
• During the earnings call, management indicated a strong pricing environment for Equifax’s key services. The improvement in prices will expand their gross margin in the future.
• Finally, Equifax will likely gain operating leverage from its selling and selling expenses as revenue growth continues at a high single-digit rate.

Taking all these factors into account, I calculate that equity will achieve 50bp annual margin expansion. The DCF summary can be found as follows:

I calculate free cash flow from equity (FCFE) as follows:

The cost of equity is estimated at 12.3% assuming: risk-free rate 3.8%; beta 1.42; equity risk premium 6%.

Discounting all FCFE at a rate of 12.3%, the one-year target price is calculated at $360 per share.

Negative risks

Equifax has completed the acquisition of Boa Vista Serviços (BVS), the second largest credit bureau in Brazil. Equifax has made good progress on its BVS integration so far, generating $41 million in revenue during the quarter. However, given Brazil’s weak economy and high inflation, I am cautious about Equifax’s business prospects in the country. Equifax is still in the process of integrating BVS’s core assets, and it remains uncertain whether the company will face integration challenges in the near future.

Final note

I view Equifax as one of the best stocks to invest in during an interest rate cut cycle because a significant portion of their overall business will benefit from a lower interest rate environment in my opinion. I reiterate a “Strong Buy” rating with a one-year price target of $360 per share.