Data is rapidly becoming the world’s most valuable commodity, and companies that gather and manage data are seeing demand for their services explode.
Take Experian (LSE: EXPN) for example. This is one of the world’s largest and most experienced data management companies, best known for its credit-rating services, although this is just one part of the group.
The company also uses data to help other businesses and brands connect with customers as well as offering services to help enterprises streamline their operations with the use of data.
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Fat profit margins
The great thing about data is that, unlike other commodities, it’s relatively easy and cheap to collect, especially for companies like Experian which dominate certain parts of the market.
Because data is relatively cheap to collect, but customers are willing to pay a premium to get hold of the information, Experian books an impressive operating profit margin of 24%, putting it in the top 25% of the most profitable companies listed in London today.
Experian is also highly cash generative. For the financial year ending 31 March 2018, the company reported a free cash flow of $769m. Management is returning virtually all of this free cash flow to investors. Last year, for example, Experian paid out a total of $392m in dividends and $565m in share buybacks.
Growth continues
I think this trend will not only continue, but cash returns will increase. Thanks to the world’s ever-increasing demand for data and data services, Experian’s earnings per share have grown at a compound annual rate of 29% over the past six years.
With this being the case, it’s no surprise that shares in Experian have returned 19.5% per annum for investors over the past 15 years, turning every £1,000 invested into £16,300.
So, even though its shares trade at a forward P/E of 26.5, I think they have the potential to make you rich as Experian continues to build on its leading position the global market for data collection and data management.
Complex product
As well as Experian, I’m also interested in Alfa Financial Software (LSE: ALFA). In some respects, this is another data play. The company develops mission-critical software for the asset finance industry, a highly valuable and regulated market.
Unfortunately, shares in Alfa dived last year after it warned on trading due to the slower than expected conversion of its sales pipeline. This extra friction caused the group’s revenue to fall by 19% for the year, and operating profit declined 34%. However, like Experian, the company is highly cash generative and its net cash balance increased 43% to £45m during the year, even though growth slowed.
Management is optimistic the headwinds that held it back in 2018 won’t be repeated. Alfa is currently progressing contractual discussions with a new sizeable European customer. It’s also entered the second phase of implementation for an existing multinational customer, which should produce a positive outcome this year, according to Alfa’s 2018 results release.
City analysts think the company will return to growth in 2019, and I’m inclined to believe them. They’re expecting the group to report earnings per share of 6.3p for 2019, up 16% year-on-year and giving a forward P/E of 19.7. This multiple might seem expensive at first glance, but when you factor in the business’s operating margin of 38%, I think it’s a premium worth paying.
