Credit Bureaus Secure With Wide Moats
Brett Horn: We think the leading credit bureaus--Experian, Equifax, and TransUnion--all benefit from wide moats. The massive databases that they have built over the years would be essentially impossible for new entrants to replicate, and the price for their services is very small relative to the amounts that lenders have at risk. This has led to an entrenched position for these three companies and strong profitability as well.
The massive data breach at Equifax last year drew a lot of negative attention to the company and the industry. We think so far the aftermath has played out largely in their favor and really is evidence of the wide moat that surrounds the business. Today, there's really been no major client defections and remediation and improved security costs are manageable. There's still potential for regulatory change. But to date, we haven't really seen anything dramatic on that front. The only move has been to make credit freezes free for consumers, but that's not a material source of revenue for the industry.
Longer term, we see a secular opportunity for the industry as the rise of middle class populations in emerging markets will create opportunity for the credit bureaus to replicate their business model internationally. For any quality-focused investor these companies should be on your radar. They have both wide moats and good long-term growth prospects. In terms of valuation today, Equifax trades at a modest discount to our fair value estimate, but obviously, there's still some remaining uncertainty from the breach.