The first-quarter reporting cycle has seen strong earnings and revenue growth, which is expected to reach its highest level in seven years.
According to the latest Earnings Outlook, S&P 500 members from the Business Services sector have already reported financial numbers and recorded top- and bottom-line growth of 22.5% and 6.8%, respectively in the first quarter of 2018. The report also states that 80.8% surpassed revenue estimates and 88.5% outperformed on the earnings front.
The sector benefited from a strong U.S. economy, reduced tax rates, robust manufacturing and non-manufacturing activities, easing of the U.S. dollar and momentum in oil prices. Notably, it has performed well in the past year compared with the benchmark. It has gained 25.3%, significantly outperforming the S&P 500’s rally of 19.9% in the said time frame.
Given this backdrop, let’s do a comparative analysis of two Business - Information Services stocks - TransUnion (TRU - Free Report) and The Dun & Bradstreet . Both companies reported better-than-expected first-quarter 2018 results with year-over-year earnings and revenue growth.
As both carry a Zacks Rank #2 (Buy), we are using certain other parameters to find out which company is better positioned following their earnings release. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
TransUnion clearly scores over Dun & Bradstreet in this regard. TransUnion has gained 65.7% in the past year, massively outperforming the industry’s rally of 28.8%. Dun & Bradstreet, on the other hand, has underperformed the industry with a gain of 17.9%.
Earnings Estimate Revisions
The direction of estimate revisions serves as an important pointer when it comes to the price of a stock. Based on second quarter and full year earnings estimate revisions in the last 60 days, TransUnion is better placed. The Zacks Consensus Estimate for second-quarter earnings increased 5.3% for TransUnion against a decrease of 0.7% for Dun & Bradstreet. For 2018, estimates for TransUnion and Dun & Bradstreet have increased 5.2% and 4.3%, respectively.
Earnings growth along with stock price gains is often an indication of a company’s strong prospects. TransUnion’s second-quarter earnings are projected to grow 27.7% while that of Dun & Bradstreet are expected to increase 7.1%. Looking at the full year 2018 picture, TransUnion’s earnings are projected to grow 29.4% while that of Dun & Bradstreet are expected to increase 15.1%. Thus, TransUnion has an edge over Dun & Bradstreet in terms of quarterly and yearly projected earnings growth.
Net profit margin helps investors evaluate a company’s business model in terms of pricing policy, cost structure and operating efficiency, and shows how good it is at converting revenues into profits. Hence, a strong net profit margin is preferred by all classes of investors.
Even though readings for both the companies compare unfavorably with the industry’s figure of 19.3%, TransUnion has a lead since its TTM net margin is higher at 17.6%, compared with Dun & Bradstreet’s 16%.
The Price to Earnings Ratio (P/E) metric is used to measure a company's value relative to its earnings. In general, a lower number or multiple is usually considered better than a higher one.
The trailing 12-month price-to-earnings multiple for TransUnion and Dun & Bradstreet is 37 and 16.4, respectively, while that of the industry is 26.8. Dun & Bradstreet has an edge with a lower P/E ratio and is undervalued relative to the industry.
The EV/EBITDA metric is used to compare two stocks within the same industry and offers a clearer picture of a company’s valuation because it includes debt. The ratio is often used in addition to the P/E ratio.
We observe that while TransUnion and Dun & Bradstreet have EV/EBITDA ratios of 23.7 and 8.7 respectively, the industry’s figure stands at 17.4. Thus, Dun & Bradstreet is better positioned with a lower EV/EBITDA value and is undervalued relative to the industry.
TransUnion is overvalued relative to the industry in terms of both the metrics.
Our comparative analysis shows that TransUnion scores over Dun & Bradstreet in terms of net margin, expected earnings growth and earnings estimate revisions. Its share price performance over the past year has also been relatively better. Dun & Bradstreet has an edge solely in terms of valuation.
So, even though TransUnion seems expensive compared to Dun & Bradstreet, it is likely to generate higher capital appreciation.
Some other top-ranked stocks in the broader Business Services sector include Automatic Data Processing (ADP - Free Report) and Broadridge Financial Solutions (BR - Free Report) , each carrying a Zacks Rank #2.
The long-term expected earnings per share growth rates for Automatic Data Processing and Broadridge are 11% and 10%, respectively.
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