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Slowing consumer credit growth pinches at the profitability of lenders. It also cramps the style of agencies tasked with judging whether loans will be repaid. Shares in credit checker Experian underperformed as interest rates rose. After falling by a fifth in 2022, they trod water for much of last year before a December bump.
Yet the London-listed company is well placed to deliver growth. Experian is the world’s largest credit bureau, with the heft to expand into adjacent markets. Much of its growth comes from new software products designed to analyse data, make credit decisions and prevent fraud.
Scale is an advantage in a sector where multiple data sources improve credit score quality. Experian benefits from the interplay between its business-to-business and consumer services arms. Freemium users of the latter get free credit and identity theft monitoring services, usually in exchange for their data.
The resulting network effect creates an economic moat. Operating profit margins of 27 per cent are about twice the UK-listed corporate average, says Liberum. The company converts 98 per cent of operating profits into operating cash flow. Those advantages explain what is a lofty rating by FTSE 100 standards. The shares trade at 27 times earnings, three percentage points above the 10-year average.
Experian is not invincible. Big Tech could prove a formidable competitor if it opts to apply behavioural and shopping data to create credit scores. Cyber attacks are a constant threat too. Credit checking is also a highly regulated industry. This could involve risk given the political sensitivity of data privacy and loan access. The creation of a public credit reporting agency was mooted in Joe Biden’s 2020 campaign, supposedly to help low-income groups access loans.
But Experian’s opportunities are more obvious than its risks. Organic revenue growth has averaged 6 per cent since it demerged from the retail conglomerate GUS in 2006. As a reliable, cash-generative compounder, it is a creditable proposition.
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