Even though Equifax (currently trading at $263.33 per share) has gained 11.8% over the last six months, it has lagged the S&P 500’s 17.5% return during that period. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Equifax, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Equifax Not Exciting?

We're sitting this one out for now. Here are three reasons you should be careful with EFX and a stock we'd rather own.

1. Shrinking Adjusted Operating Margin

Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.

Looking at the trend in its profitability, Equifax’s adjusted operating margin decreased by 6.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 20.6%.

2. EPS Barely Growing

We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.

Equifax’s EPS grew at an unimpressive 4.5% compounded annual growth rate over the last five years, lower than its 9.3% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

3. Previous Growth Initiatives Haven’t Impressed

Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Equifax historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 10.9%, somewhat low compared to the best business services companies that consistently pump out 25%+.

Final Judgment

Equifax isn’t a terrible business, but it doesn’t pass our bar. With its shares trailing the market in recent months, the stock trades at 31.4× forward P/E (or $263.33 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d recommend looking at one of our all-time favorite software stocks.

Stocks We Like More Than Equifax

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