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Transunion - Boring Is Good

|About: TransUnion (TRU)
Summary

Company's core business has a wide moat.

Growth prospect remain bright.

Momentum of the stock is very strong indicating institution support.

Buy Transunion (NYSE:TRU) as it offers investors the best of both worlds, a defensive company at its core with huge growth potential.

Core business with a strong moat.

The company owns a huge amount of data that constituted its huge moat. The company has over 50 petabytes of data and that is growing at an average rate of ~ 25% per year since 2010. As amassing this amount of data takes years and infrastructures to store them cost a fortune to build, it is very difficult if not impossible for new entrants to break into the market.

Nature of its core business makes the company a partial utility. As there is a limited number of firms have access to the amount of data TRU has, businesses have no one but TRU to turn to when they need to evaluate their customer’s creditworthiness, this creates a recurring revenue stream and stable cash flow for the firm. In fact, the company has contracted with eight of the ten largest banks and all of the top ten credit card issuers in the USA, showing that its dominance in the industry.

Strong presence in the Developed market. The firm has a long history of offering its service in international developed markets. The firm is one of the only two nationwide consumer reporting agencies in the Canadian market and is the primary supplier of consumer credit data to the top ten banks in Hong Kong.

Future growth opportunities

Business Analytics. There is a long-term trend of businesses using data to make informed decisions and manage risks more efficiently. The firm will benefit from the trend for the following reasons.

The firm has powerful big data capabilities. The firm is now collecting data from more than 90,0000 data sources and processing approximately 4.8 billion updates each month. The strong processing power allows the company to handle the rapid growth in Data creation and application. Increasing lending in Emerging market. Credit penetration rate remains low in EM countries (i.e. <25% of the adult population in India is currently credit active). As smartphone penetration rate continues to increase in emerging market economies, more and more individuals are gaining access to banking and credit services, which will increase demand for TRU’s services.

Core IS service in India. The company has been operating in India since 2001 and has accumulated a range of non-credit data sources like the national voters' registry and the national ID database. The wide range of data allows the company to sell analytics and decision service. Strong capability of the firm has been acknowledged by the market, the firm is now the primary risk and information solution provider for financial institutions in India and clients include all of the top twenty banks in the country.

Equifax data breach. On the home front, the Equifax breach severely damaged client’s trust in the firm and many of those clients may take their business to TRU and further boost TRU’s USIS business.

Fundamentals

Source: Bloomberg 

Fundamentals remain strong. The firm’s revenue from USIS and Online Data service increase every quarter YoY over the past 5 years and the strong trend of growth is likely to continue given the strong growth of credit data products like Credit Vision (+40% YoY in 2Q18). The market is now expecting Q3 and Q4 revenue to exceed $0.6B and reaching $2.3B for FY18. 

Source: Bloomberg

Source: Bloomberg

In addition to the ever-increasing revenue, gross margin is also improving over the years and cash flow from operating activities had only been in the negative territory once in the past 5 years.

Valuation

The stock is now trading at 50.71x trailing 12M P/E and 29.06x forward 12M P/E. Given the stock has an average historical P/E of 94.03x earnings and a median historical P/E of 47.89x earnings, the stock is now fairly valued.

Positioning and Technical

The stock has hugely outperformed the market YTD (40.45% vs 8.5% of SPX) and is showing no signs of slowing down (evidenced by the strong relative strength against SPX), it is currently in a long-term uptrend and is likely to make a new high soon.

Source: Tradingview


Source: Stockcharts

The street is bullish on the stock with 69.2% buy rating and no sell at all. The market’s confidence in the stock is also shown by the low short interest in the stock despite it is near its historic high.

Source: Bloomberg

Source: Bloomberg

Risks

Security risk. If the company fails to protect its data, the outcome may be disastrous. Equifax’s stock dropped more than 30% in a week after its data breach incident. Despite the huge impact, the risk of this happening is relatively low.

Emerging market growth slows down. As emerging markets' economies are highly unpredictable, there may be a chance that the company’s growth to stall in those regions for reasons unknown. However, as the company provides a near utility service, the risk of this happening is relatively low.

Conclusion

Transunion's core business has a wide moat and it is unlikely to be challenged in the foreseeable future. Given the firm's strong growth prospect and strong momentum, its stock is now fairly valued. For that reason, now is a good time to long the stock.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.