Credit reporting agency Equifax Inc. (NYSE: EFX) has taken a beating this year.

The stock is down 40% – twice as much as the overall S&P 500, which is having a miserable year of its own.

This steep drop in share price intrigues me because Equifax is a strong company with an extremely durable competitive moat that protects its business.

Along with Experian (OTC: EXPGY) and TransUnion (NYSE: TRU), Equifax is one of the “big three” consumer reporting agencies.

These companies make their money by selling consumer credit and insurance reports to businesses.

Equifax’s customers include utilities, government agencies, banks, insurance firms, retailers – anyone who might be extending credit to a customer and needs to know the customer’s historical track record of making good on their financial obligations.

Equifax’s moat comes in the form of the massive amount of data the company possesses. It has information on over 800 million individual consumers and 88 million businesses across the globe.

That data hoard is incredibly hard to duplicate and speaks to why there are only three real players in this business.

As investors, we should always be interested in owning companies with this kind of protective moat around them, provided the price that we pay for the shares is reasonable.

Since the turn of the century (and long before), an investment in Equifax has smashed the performance of an investment in the S&P 500.

When you see a long-term stock chart that looks this good, you can bet that earnings growth has driven the share price higher.

In 2001, Equifax was bringing in $0.81 per share in earnings. In 2021, the company posted $6.11 per share in earnings.

Over time, stock prices follow earnings. The big increase in earnings this century is why there has also been a big increase in Equifax’s share price.

This is a great company with a strong moat and a long-term track record of exceptional growth.

But the question remains as to whether battered Equifax shares are now a table-pounding buy…

Perhaps surprisingly, my answer is no. Or at least not yet.

With mortgage rates having skyrocketed this year, there’s going to be a significant negative impact to Equifax’s business in the near term.

A large portion of the revenue that Equifax generates is tied to the volume of loans being originated. With interest rates up so much and the economy slowing, loan originations are going to decline.

Currently, Equifax is guiding for earnings per share of $7.55 to $7.80 for 2022.

With Equifax currently trading around $190 as of writing, that means the stock is trading for 24 times the company’s projected earnings per share for 2022.

That’s too rich of a price to pay for a company facing near-term macro-level headwinds.

Instead of buying, I recommend that we put Equifax on our watchlist in the hope of a further fall in share price so we can swoop in, buy at a much better valuation and then wait for the company to resume growing.

Today, despite the fact that I really like the company, I rate Equifax shares as “Slightly Overvalued.”

Valuation Rating: Slightly Overvalued

Good investing,

Jody

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