[Research/Update] Equifax

This story is getting better

Held.

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I wrote an opinion piece on Equifax’s Workforce Solutions (EWS) about this time last year. The Work Number (TWN), sits squarely within this reporting segment. A few interesting changes within the business catalysed myself to purchase a small position. Take that as you will.

TWN is a business well worth studying. I elaborated on this in my previous piece, and I tweeted recently:

This stirred a few DMs. It also prompted comparisons to my beloved Fair Isaac Corporation. To be sure, FICO is a simpler business, but a better business I am not so sure. That isn’t to say that the earnings trajectory of EWS will be better (in fact I am fairly sure that it will not) but TWN exhibits so many self-reinforcing feedback loops (aggregation, reciprocity, data gravity, value-based business model, etc) that it’s very hard to think of a way it could be obviated excepting significant regulatory reform. There are many forces working toward a similar end.

TWN is a wonderful asset but unfortunately it’s lumped together with Equifax’s traditional credit bureau business (amongst other things). Even within EWS, TWN is linked with a very mediocre Business Process Outsourcing (BPO) operation. In my dreams I imagine TWN being a standalone business, running a leveraged recapitalisation program a la FICO. In reality it’s true that EWS’s offering is advantaged by being close to the credit file, and would likely not even exist if HR and administrative functions in corporate America were not outsourced beginning in the 1980’s. For the time being the present corporate agglomeration persists, and probably should.

My concerns when the company traded at around a $20B market capitalisation range were with 1). competitive positioning, 2). the length of EFX’s investment timeline with respect to their cloud migration (one of the most expensive that I am aware of), and 3). the downstream effects that would have on capital returns going forward. I probably omitted concerns around the long term prospects for residential mortgages, which is much more acute in EFX’s case than, for example, FICO’s. The latter’s earnings trajectory has been virtually unaffected by the volume of mortgage inquiries and applications because of their ability to price mortgage Scores freely. While TWN has considerable pricing power, and the credit bureau business also enjoys a privileged position, I had concerns around how the FHFA’s new directive on what credit reports and what scores would be necessary for a conforming GSE mortgage. The gravity of these probably aren’t as great as I once thought.

In short, and to my chagrin, the story is a little more complex than: ‘price of the brick going up’.

The essential element of all great compounding machines.

Mortgage

Source: 3Q24 Earnings Presentation Consolidated

To cut a long story short, both EWS and US Information Services within EFX (read the credit bureau business - USIS) have large mortgage related lines of business. The credit file is naturally an essential part of the GSE-backed mortgage regime, and verification of income and employment is an essential element across the mortgage landscape, even for those that aren’t backed by the GSEs.

The Pandemic pulled forward an immense amount of demand for mortgages. We are now settling into year 3 of well below trend (at least by pre-Pandemic levels) mortgage inquiry volumes. Of course, this level is simply a result of the odd set of circumstances affected by a cocktail of higher interest rates, higher home values, and less purchasing power post-Pandemic. It is going to take some time for volumes to resume, but resume they will.