Why Wall Street is sticking with Equifax

Is embattled Equifax (EFX), probably one of the most hated companies in the country these days, in extreme danger of unraveling? 

It was bad enough that this leading worldwide source of consumer and commercial credit data had been hacked, but worse, it didn't disclose the problem when it happened several months ago. That left millions of its customers – nearly all of whom have little say in the matter -- more concerned and feeling helpless and vulnerable to the criminal designs of the still unidentified cyberthieves.

Indeed, that massive data breach was possibly one of the worst things that could happen to this global data-sensitive company. And then last Thursday, some more unpleasant news emerged: The IRS said it was temporarily suspending its $7.1 million data security contract with Equifax after malware was detected on some pages of the credit bureau's website.

Upon investigating this latest incident, Equifax contended that it wasn't officially a hack. A vendor, it said, had run code that served "malicious content" on the Equifax site. So Equifax quickly removed the vendor's code from the page and took it offline for further analysis. 

But on Wall Street, these alarming problems aren't viewed as dire to Equifax's business and leadership role in the consumer lending ecosystem. A number of analysts believe Equifax's operations and volume of business won't suffer as much as many predict. 

They continue to stick to an upbeat outlook despite Equifax's disastrous data breach, which pounded the company's shares to as low as $92 on Sept. 11, way down from $142 just several days before. Last summer the stock traded as high as $145 a share.

It has since rebounded a bit, closing at $109.50 on Oct. 13, up 0.71 percent, or 77 cents on the day. Part of the reason for the stock's recent rise was the continued support from Wall Street analysts.

"We believe Equiifax's long-term financial model remains intact," said William A. Warmington, senior analyst at Wells Fargo Securities, in a recent report to clients. He said he was reiterating his "outperform" rating on Equifax following the three-day Congressional testimony by former CEO Richard Smith. "We expect investor focus to now turn to preliminary 2018 guidance on Equifax's third-quarter earnings call," he said. 

Warmington noted that his 2018 estimates were below consensus because many investors expected 2018 to be a "transition year," with revenues and costs predictably affected by the breach. The challenge to management, he added, is to provide insight into the breach's impact, such as which costs are transitory versus fixed.

But he reiterated that Equifax's long-term growth model remains viable, and so he has now introduced above-consensus estimates for 2019 revenue of $3.77 billion and earnings per share of $6.80.     

Some analysts believe the Congressional hearings were a win for Equifax. Afterward, said George Mihalos, equity analyst at investment firm Cowen, "we see little long-term risk to Equifax's B2B [business-to-business] business and its role in the consumer lending ecosystem." 

In a note to clients, Mihalos pointed out that while most of the dialogue in the hearings aimed at Equifax's failure to protect consumer data and its remediation plans after the breach, "there was a general consensus from Capitol Hill around the importance the bureau plays in greasing the wheels of consumer lending." 

And Congress, he noted, didn't have a "feasible alternative" to the current operating model. The hearings "reaffirmed our view that that material changes to Equifax's B2B business (88% of total revenues) are unlikely."

Mihalos noted that a significant amount of time at the hearing was devoted to Equifax's new free lifetime credit-lock service. Former CEO Smith argued that it's the best and most secure way of protecting consumers from fraudulent activity.

Nonetheless, given the string of bad news that continues to hound Equifax, some analysts concede that its near-term  stock performance could be volatile. Still, Shlomo H. Rosenbaum, analyst at investment firm Stifel, expects the "confluence of a positive consumer credit environment, focus on new product innovation and further expansion into additional geographies and ancillary areas will generate solid results in the intermediate term."

He rates the stock a "buy," with a price target of $149 a share, and he expects Equifax to earn $6.06 a share in 2017 on revenues of $3.4 billion, up from last year's sales of $3.1 billion. For 2018, he forecasts earnings of $6.79 a share on revenues of $3.6 billion.

Keith Snyder, equity analyst at CFRA Research, argued that while the hacking will "act as a short-term headwind, long-term business trends remain intact." He noted that Equifax is facing FBI and Federal Trade Commission investigations, as well as over 100 lawsuits. But he expects insurance should cover some of the breach costs.

So he also rates the stock a "buy," with a 12-month price target of $115. Snyder expects revenues to increase 7.9 percent this year and 6.8 percent in 2018, driven by acquisitions and by the strength in Equifax's U.S. Information Solutions segment and the Asia-Pacific market.

One thing that might help these optimistic forecasts: If Equifax can stay out of the news for a while.