In my view, Experian (LSE:EXPN) is one of the best UK stocks on the market right now. It’s a FTSE 100 stock that I would buy today and hold for the next decade.
The stock is down 9% compared to where it was a year ago. But I think that the underlying business is one to own for the next decade.
I own Experian shares in my portfolio. At a price-to-earnings (P/E) ratio of 28, there’s a risk the stock is over-valued.
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Nevertheless, I think that the quality of the business justifies the price tag. Here are five reasons why I’d be happy to buy Experian shares today.
An indispensable business
The most important feature of Experian’s business, in my view, is that it provides an indispensable service. There are two reasons for this.
First, an Experian credit report is a requirement for the majority of US mortgages. This gives the company’s earnings a high degree of stability.
Second, the cost of a credit report to a bank is negligible compared to the risk it offsets. On average, a credit report costs around 0.1% of the value of a mortgage.
To me, this means that Experian’s core business is likely to be doing well a decade from now.
Limited competition
Experian operates in an industry with limited competition. It’s not the only credit bureau, but I don’t think that there is any significant threat of disruption.
Equifax and TransUnion also offer similar products. But the competition doesn’t, as far as I can see, threaten Experian’s business.
The low cost of credit reports as a percentage of a mortgage means that banks typically want all three reports. And even if they don’t, all three are a requirement for US mortgages.
All of this means that I think that Experian is well-protected from its competitors.
Strong margins
Experian’s advantages result in a business that has impressive financial metrics.
Last year, Experian used $400m in fixed assets and generated $1.37bn in operating income. That’s a 330% return, which I think is impressive.
By comparison, Apple generates a return of 303%, Alphabet achieves 75%, and Meta Platforms manages 63%. In other words, the FTSE 100 stock generates cash more efficiently than some of the best big tech companies around.
Barriers to entry
An attractive business is likely to attract competition, which presents a risk to shareholders. But Experian’s business is well-protected from disruption.
The company’s database is an asset that is hard to replicate. It covers around 1.2bn people and around 145m businesses.
Its size is one issue but there’s also an issue of where it comes from. Experian’s data comes from various financial institutions that a new operation would find hard to match.
I therefore think that Experian’s attractive business metrics are well protected from disruption.
Growth opportunities
The risk with Experian’s business is that demand might slow down as rising interest rates result in fewer mortgage applications. But in my view this is a short-term issue.
Moreover, even if mortgage demand in the US does slow, I think that the company has some attractive growth opportunities to offset this.
Experian has been establishing a dominant position in Latin America, most notably Brazil. This, in my view, should help earnings continue to move forwards even in a slow US market.
