TransUnion: Emerging Market Growth Story Admitst Uncertain Domestic Headwinds (NYSE:TRU)

Introduction

Leveraging 50 years of consumer data, TransUnion stands at the cusp of expanding its presence internationally. With global credit markets thriving, TransUnion(NYSE:TRU) offers services that include credit reporting, fraud prevention, and marketing solutions for businesses in the United States and internationally. In the past quarter, we saw TransUnion exceed expectations for revenue and EPS. Market forecasters who predicted a slowdown for TransUnion were surprised at the resilience displayed even during a high interest rate environment. A key thing to realize about the company is that it offers in-demand services that help businesses regardless of the overall market environment, which makes it more akin to a technology company than a credit reporting company.

Key Growth Drivers

Here is the main way that TransUnion has been able to defy market expectations:

• International Expansion: TransUnion experienced 31% YoY growth in India, and double-digit growth in Canada, Asia Pacific, and Africa. The emerging market compensated for the domestic slowdown in the United States (discussed in the Headwinds Section below).
• Disciplined Operating Strategy: TransUnion plans to reduce its overall operating expenses by $200 million by 2026 through its cloud migration, state-of-the-art Neustar technology implementation, and other technological modernization initiatives.
• Product Innovation: Attractive products like TruVision Risk Solutions, TruIQ, Trusted Call Solutions, etc. enable TransUnion to attract new customers and offer a broad suite of tools for risk management, consumer insights, and marketing management. TransUnion continues to innovate in each of these areas winning customers globally.
• Mortgage Sector Strength: Contrary to analyst expectations, high interest rates have not trickled deeply into the fabric of the US economy. TransUnion experienced a 52% 1Q2024 growth benefit from this disparity.
• Increased Reliance on Data for Making Decisions: More companies are relying on data to make decisions about which employees to hire, who to accept as tenants, and how to assess the creditworthiness of individuals and businesses. Additionally, a lot of this data is now accessible digitally and accessible quickly with the technologies implemented by TransUnion. As this trend continues, TransUnion should be at the forefront of capturing any new opportunities.

Headwinds

TransUnion is sensitive to three main macroeconomic factors:

• Stresses In the Consumer Banking Sector: Recent earnings reports from major banks have indicated a reduced level of loan, deposit, and income growth from consumers. The effect could easily snowball given the rise in recent unemployment and anticipated stand-still in interest rate reduction between the incoming data and the mandate of the US Federal Reserve to curb inflation. If these stresses continue, the top-line growth related to the mortgage could stagnate.
• Changes in Regulatory Environment: Tenant housing and apartment rental and pre-employment screening could face changes due to changes in laws proposed by the US Congress, which seeks to make access to housing and jobs less discriminatory.
• Miscellaneous Geopolitical Changes: As a long shot, changes to the policies of different countries may reduce access to consumer data required by TransUnion to provide its services in various geographic regions. Such concerns are under active consideration by the governments of many countries.

Fundamental Analysis

As we can see from the company income statement, TransUnion suffered a loss in overall net profit after tax in 2023 amidst the panic and fears of high inflation and bank failures. From the income statement below, we see a decline in net margin of around 15% between 2022 and 2023. However, according to the 1Q2024 earnings call, the company’s quarterly revenue exceeded $1 billion for the first time in its history. Furthermore, the company raised its 2024 guidance for revenue growth between 5-6.5% and EPS growth between 10 – 15%. Additionally, the company anticipates the EBITDA margin at a near all-time high of 35.1%.

Based on the company expectations, I anticipate around a 16 – 20% upside for TransUnion based on the following DCF evaluation:

The weighted average cost of capital is based on the following assumptions:

Technical Analysis

Based on the chart below, we can see that TRU has been trading in a tight consolidation triangle. Perhaps the best strategy to utilize would be to wait for the price to break above $80 before considering a stock purchase. Above $80, the current triangle resistance could reasonably be expected to act as support. Investors utilizing technical analysis should also consider placing a protective stop loss below $70 because, below $70, the triangle pattern would be considered invalid.

Competitor Analysis

According to 6sense, TransUnion commands a dominant position with over 66% market share when it comes to credit reporting. Other competitors and their respective market shares are listed below:

Click to enlarge

From the chart above, we don’t anticipate any threats concerning competitors because there is a large gap between TransUnion and the rest of the market, that is unlikely to be close anytime soon.

Earnings Preview

TransUnion is scheduled to announce its earnings on 7/25/2024 (Pre-Market). Most analysts have revised their estimates higher, which indicates a strong belief in the TransUnion growth story.

In addition to the metrics listed above, investors should assess how well the company is performing relative to its projections from Q12024:

• Overall revenue growth rate of 5 – 6.5% and EPS growth rate of 10 – 15%: Markets would react to any indication of an upward or downward revision relative to these expected growth rates. Therefore, company forward guidance will be crucial to the stock price.
• International Growth Story: A large portion of the future growth of TransUnion is tied to technology adoption in international markets, particularly India, Canada, Asia Pacific, and Africa. Stock prices could move significantly if there is any drastic change in these expectations.
• Mortgage Sector Resilience: Investors should also look for clues about the resilience of the mortgage sector and whether it remains strong amidst the high interest rates. Any indication of better-than-expected performance in this aspect will bolster the price of TransUnion.

Investment Risks

Although the mortgage market has displayed resilience bolstering the balance sheet of TransUnion, the future remains uncertain and largely dependent on the projection of anticipated interest rate cuts in 2024. Additionally, the company has $5.3 billion in debt and a leverage ratio of 3.5x. While the company aims to reduce these levels gradually, operating with high debt could be a concern, especially in a high-interest-rate environment. Lastly, as the company has to innovate continuously, we can anticipate TransUnion expanding into new verticals where they will face increased competition from established players.

Conclusion and Recommendation

TransUnion offers a compelling case for investors looking to profit from the recovery post-inflation recovery. While a majority of the focus has been on companies that cater to the technology and AI sector, smaller players like TransUnion could offer a more compelling risk-reward as the interest rate hikes and inflation begin to curb. TransUnion is certainly a sector leader in terms of credit reporting and data analytics and has attractive recovery prospects domestically and growth prospects internationally. Investors should conduct their due diligence and consider investing in TransUnion as a way to capture the potential upside discussed in this article.