Dun & Bradstreet (DNB, Financial) is a provider of business information with a history dating back over 165 years. Today's company has 3 business segments. Risk Management, driving about 64% of sales, provides reports and other information products that allow companies to determine creditworthiness of potential customers. This unit may best be thought of as a Moody's (MCO) or S&P (MHP) rating agency for private companies... in fact Moody's was spun off from the "old" Dun & Bradstreet in 2000. The second business unit is Supply, Sales, and Marketing (28% of sales), which provides information to help customers identify market segments, profile potential customers, build mailing lists, and evaluate current and potential suppliers. The third and final segment is Internet Solutions, consisting mainly of Hoover's, which has basic information on thousands of public and private companies, and AllBusiness.com, a resource and advice portal for business managers.
Dun & Bradstreet is a very attractive business. The company's long history, established customer relationships, high retention rates (over 90% of risk management customers renew their subscriptions), and unmatched database of 140 million business records gives this company an extremely wide moat. Although there is some competition in risk management, particularly Experian and Equifax (EFX), Dun & Bradstreet is the market leader. Two classic long-term competitive advantages apply here.
Dun & Bradstreet is a very attractive business. The company's long history, established customer relationships, high retention rates (over 90% of risk management customers renew their subscriptions), and unmatched database of 140 million business records gives this company an extremely wide moat. Although there is some competition in risk management, particularly Experian and Equifax (EFX), Dun & Bradstreet is the market leader. Two classic long-term competitive advantages apply here.
One is the company's huge database, which would be nearly impossible for a competitor to build and maintain in any reasonable amount of time. Second is the "network effect". Companies want to be included in DNB's database because that is where creditors look for information, and creditors look for information at DNB because that is where the best client data comes from. These two factors together combine to create very high barriers for new competitors, and for the competitors that do exist, makes it difficult for them to gain market share. And, of course, in a market with few serious competitors, pricing usually remains rational, so the threat of a cost war is minimized. DNB's competitive position is outstanding.
The quality of the business also shows up in the financial statements. DNB is exceptionally profitable, running an operating margin currently over 28%. Management has made a point of investing only in high margin businesses, while divesting ones with less attractive metrics. Compare today's margin with a 22.5% figure 5 years ago. Free cash flow generation is outstanding, with FCF margin at 22% and rising. The balance sheet at first blush does not look great - cash holdings are $226 million with a debt burden of $869 million. But we have to look deeper to see if financial health is truly at risk. It isn't here. DNB has no debt maturities in the next 12 months, operating income covers interest requirements 12 times over, and DNB's stable, mostly non-volatile business generates enough cash to easily cover commitments. Financial health is solid.
The third and final thing we need to look at is growth potential. Clearly, this is not a company that will be growing revenues at a 20% annual pace! The business is established and saturated in North America, leaving overseas territories as the main growth drivers. To this end, DNB is putting its free cash towards acquisitions in high-growth geographies. Some examples of this are the purchase of ICC, an Irish credit and marketing firm, in August; and a joint venture with Beijing Huicong International Information Co. Ltd., among others. International revenues grew 20% last quarter, at high margins, although they still represent only about 23% of sales. On the bottom line, incremental profit will also come from a still-increasing operating margin as the company expands into higher margin delivery mechanisms like the Internet. Finally, shareholder value is being created with extensive amounts of free cash being returned directly in the form of buybacks and dividends. The company currently pays a solid 1.8% yield, and has reduced outstanding share count by 6% annually for the past 5 years.
The main thing holding Dun & Bradstreet down is the weak economy. Its customers are clearly trimming back marketing budgets and, with less credit activity, DNB's services are less in demand. Revenue is expected to be down about 3% this year, profits about flat. Also, DNB is not particularly cheap for a Magic Formula stock. Its 9.8% trailing earnings yield, and 9.1% forward earnings yield are some of the more expensive in the MFI universe (though certainly not pricey against the overall market).
Still, a discounted free cash flow analysis yields a fair value around $100 for this stable cash producer, making it an attractive investment for the more conservative investor. Dun & Bradstreet is a fine MFI stock, and one I'll be keeping an eye on as a potential MagicDiligence Top Buy.
Quick Look
Date: Oct 7, 2009Growth: CCompetitive Moat: AManagement: B-Financial Health: B-Opinion: Stable cash producer with strong competitive position. Buy.Steve owns no position in any stocks discussed in this article.
Steve Alexanderhttp://www.magicdiligence.com/
