Why the Experian share price is soaring after Q4 results

The Experian share price is at all-time highs after the company’s latest trading update. But does 6% revenue growth justify a P/E ratio of 42?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Silhouette of a bull standing on top of a landscape with the sun setting behind it

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A cyclical recovery in the US and strong growth in Latin America is sending the Experian (LSE:EXPN) share price to all-time highs. But it might not be too late to buy the stock.

With revenue growth at 6% and a price-to-earnings (P/E) ratio of 42, Experian shares look expensive at first sight. Despite this, I think investors should take a closer look.

Investment thesis

Experian has attractive unit economics and a business that’s extremely difficult to disrupt. But is that worth paying 42 times earnings for when the FTSE 100 trades at 12.5 times?

The answer comes down to how much the business is going to grow. Right now, the firm has a market-cap of around £34bn and generates around £1.1bn a year in free cash.

That implies a 3.2% annual return. With a 10-year UK government bond coming with a 4.1% yield, the company has to grow over the next decade to be a good investment.

The question for investors is how much Experian is going to grow and where that growth is going to come from? And the latest earnings report provided some insight here. 

Growth

Experian reported revenue growth of 6% for the 12 months ending in March. That doesn’t sound like a lot, but there are a couple of reasons for shareholders to be positive.

First, the rate of growth is increasing. Sales grew 8% between January and March, compared with 6%, 5%, and 5% during the previous three.

Source: Experian Full Year FY2024 Results Announcement

Additionally, the US credit bureau grew its revenues by 9% (compared with 1%, 2%, and 2% earlier in the year). This is the largest part of the business, accounting for 23% of sales.

Lastly, the fastest growing part of the company – Latin America – continued its 13% growth rate. The highlight was the consumer division, which reported 19% growth. 

Outlook

Looking ahead, management forecasts revenue growth of around 8% is likely to prove sustainable over the medium term. And it also said it expects margins to expand.

This growth isn’t guaranteed though. The earlier part of the year has demonstrated just how exposed the company still is to a macroeconomic downturn, especially in the US.

The longer it takes for interest rate cuts to arrive, the more difficult it will be for Experian to hit its growth targets. And this is a risk investors should bear in mind.

If the company does hit its targets though, free cash flow could grow by 10% a year. That would result in an average free cash return of 5% a year over the next decade.

A stock to consider buying

Experian shares are at all-time highs. It’s difficult to buy a stock when it’s never been more expensive, but there’s something else investors should note.

It’s obviously true – but it’s worth pointing out that the stock has been at all-time highs before. And it’s always found a way to go higher from there.

That’s because Experian is a quality business and quality businesses often make great investments. I think it’s worth considering for investors looking for stocks to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended Experian Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Stack of one pound coins falling over
Investing Articles

2 penny shares I think could shine in 2025

I have my eye on a few penny shares, as I'm thinking that the year ahead could turn out to…

Read more »

Investing Articles

2 ISA strategies for success in 2025

The ISA is a great vehicle for our investments, sheltering our returns from tax and providing us with the opportunity…

Read more »

Investing Articles

Here’s how an investor could start building a £10,000 second income for £180 per month in 2025

Our writer illustrates how an investor could put under £200 each month into shares and build a long-term five-figure passive…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Here’s how I’m finding bargain shares to buy for 2025!

Our writer takes a fairly simply approach when it comes to hunting for cheap shares to buy for his portfolio.…

Read more »

A graph made of neon tubes in a room
Investing Articles

Up 262%! This lesser-known energy company is putting other S&P 500 stocks to shame

Our writer delves into the rationale behind the parabolic growth of this under-the-radar S&P 500 energy company. The reason isn’t…

Read more »

Investing Articles

Just released: December’s small-cap stock recommendation [PREMIUM PICKS]

We believe the UK small-cap market offers a myriad of opportunities across a wide range of different businesses and industries.

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

£20k of savings? Here’s how an investor could turn that into passive income of £5k a year

A £20k lump sum, invested in a mix of blue-chip shares with a long-term approach, could generate thousands of pounds…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Is the BP share price set for a 75% jump?

The highest analyst target for BP shares in 2025 is 75% above the current price. So should investors consider buying…

Read more »