If not now, then when? That’s been my mindset in the past week as I’ve finally been buying some shares that I’ve wanted in my portfolio for a long time. One of them is a FTSE 100 stock that I think could give me the best of both worlds over the next few years: income and growth.
A big data refinery
“Data is the new oil.” This quote is from Clive Humby, the British mathematician who designed the Tesco Clubcard loyalty scheme. He also pointed out that, like oil, data needs extracting and refining before it can be monetised.
I see Experian (LSE: EXPN) as a big data refinery, which is why I’ve bought the stock this month. The company builds and manages gigantic databases containing the credit activity and repayment histories of consumers and businesses.
Experian actually has credit data on over 1bn people and tens of millions of businesses worldwide. This includes 245m US consumers, with 1.3bn updates a month to its databases.
It collects, sorts, aggregates, and refines data from tens of thousands of sources, to provide a whole range of information services.
Organisations purchase and use this information (in the form of credit reports) to make decisions about lending and the terms on which to lend. Its analytical tools are also used to prevent fraud.
The mind-boggling amount of data possessed by Experian is what gives it an extremely strong competitive position.
Valuation
It’s a very profitable business, with a healthy long-term operating margin of 23%. Yet its stock has a price-to-earnings (P/E) ratio of 24, which I don’t think is too expensive for a quality company such as this. I’ll get income from my investment too, as the stock pays a dividend, currently yielding 1.5%.
What I also find very impressive is the company’s return on capital (ROC). This measures a company’s annual net income, expressed as a percentage of all the capital (both equity and debt) it deploys to run its business. I’d consider anything in the low-double-digits as very good. Experian’s ROC per annum is 15%, which I think is outstanding.
Regulation risk
I do see one risk with the stock, which I think is worth pointing out. Experian isn’t the only dominant credit checking agency. It is actually part of a ‘triopoly’, along with TransUnion and Equifax. Together, these three companies dominate the credit reporting market.
Political debates about the collection and use of consumer data are becoming more common across the globe. The fact that three companies have so much control over a consumer’s ability to interact with the economy might become unacceptable. This could result in additional regulation that could harm Experian’s ability to collect fresh consumer data.
However, on the flip side, more regulation could mean it’s virtually impossible for new competitors to emerge. Extra levels of regulation would likely make the barriers to entry in this industry even higher, strengthening Experian’s competitive advantage.
I think Experian has proven that it can be trusted with such vast amounts of sensitive data. I feel this is an excellent business and I’m happy to finally have the stock in my portfolio.
