TransUnion IPO: 3 Reasons Warren Buffett Would Invest in It

TransUnion IPO: A Stock Worth Investing inTransUnion has been assessing consumers’ credit scores for more than forty years. The day has finally come for an assessment of itself. TransUnion’s initial public offering (IPO) will take place on Thursday, June 25th. (Source: Securities and Exchange Commission, last accessed June 24, 2015.)

Although it is yet to be seen how the market is going to treat TransUnion stocks, billionaire investor Warren Buffett will likely find the company suitable to his strategy.

Also Read: TransUnion IPO: Everything You Need to Know Before it Hits the Market

Economic Moat

Buffett prefers companies with wide economic moats. An economic moat is essentially a company’s competitive advantage that can protect itself from the competition. If a company wants to outperform its competitors in the long run, it better have a durable competitive advantage.

TransUnion has built that moat over the years. With tens of thousands of business connections, the company has gathered resources that are difficult to duplicate. Currently, the company provides credit information and information management services to approximately 45,000 businesses and 500 million consumers worldwide.

The industry itself has its moat, too. In this case the moat comes from high barriers to entry. The credit assessment industry is an oligopoly in nature. Other than TransUnion, the industry has two large players: Equifax Inc. (NYSE/EFX) and Experian plc (LSE/EXPN.L). It is very difficult for new companies to enter the business because it would take huge investment and time to build connections with enough companies; it would also take substantial effort to market the service to corporations and consumers.

Having a strong economic moat gives TransUnion long-term competitive advantage in its industry. And Buffett would definitely like that.

Certainty in Future Growth

Durable competitive advantage should translate into solid long-term performance. TransUnion seems to be a company that has just that.

The credit report industry has been booming for quite a while now. Today, most landlords demand seeing the potential tenant’s credit score before signing a contract. Even starting a cell phone plan may require a check on the customer’s credit history. It is safe to say that in developed economies, credit reports will remain a crucial part of business transactions.

Credit assessment is also booming in emerging markets. As financial markets become more established, access to credit and financing will improve. With more borrowing and lending taking place, credit assessments started to take their presence in developing countries. So far, TransUnion operates in 33 countries around the world, some of which are emerging economies. The rise of credit usage in those countries would translate into solid growth for TransUnion’s business.

Analytics, another part of TransUnion’s business, has also been an industry of rapid growth. According to a report by IDC, spending on business analytics services grew at 12% per year from 2009 to 2014. Growth is expected to accelerate to 15% per year until 2018.

Fair Price

“No matter how wonderful a business is, it’s not worth an infinite price.” says Charlie Munger, Vice Chairman at Berkshire Hathaway Inc. (NYSE/BRK.A) (NYSE/BRK.B), and Buffett’s right hand man. So let’s look at TransUnion’s valuation.

The company plans to sell 34 million shares between $21.00 and $23.00 a share. The total value of the IPO could top $780 million. This gives TransUnion a $4.0 billion valuation.

TransUnion’s revenue came in at $1.305 billion last year. This means the company has a price-to-sales ratio (P/S) of 3.07, a very low number compared to its competitors. Equifax has a price-to-sales ratio of 5.01, while for Experian the ratio is 3.65.

Having a low price-to-sales ratio essentially means the company’s valuation is quite low in terms of the revenue it generates. Moreover, TransUnion’s revenue has been increasing at a steady level for the past several years—from $956.5 million in 2010 to $1.3 billion in 2014.

There is a caveat, however, and it’s that the company is not profitable at the moment. Net loss was $8.8 million in 2012; increased to $35.1 million in 2013; and came down to $12.5 million in 2014. Part of this pattern was due to the rise in administrative expenses. However, in the long run, growth in revenue is likely to outpace the increase in costs and the company will eventually turn profitable.

Bottom line: we don’t know if Buffett would invest in TransUnion, but this is certainly a company that would fit his criteria.