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Experian: Credit Wary?

Last updated: 08:15 04 Dec 2009 GMT, First published: 09:15 04 Dec 2009 GMT

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… Experian currently trades on a hefty forward earnings for 2010 of 15.8x, which is up from around 7x a year ago. The group yields around 2% and very little growth is expected in 2010.



A glance at the above chart of the FTSE 100 highlights the strength seen in equity markets this week. Investors continue their recent strategy of buying on weakness, which was last week created by uncertainties surrounding Dubai’s debt problems.

Fears subsided as Dubai World, a state owned investment company, restructured its debt and broadly encouraging global economic data also provided investors with some reassurance that the global recovery remained on track.

Solid manufacturing data from China enhanced sentiment and caused gold and other commodity prices to forge ahead. The precious metal traded a record peak above $1225, as platinum, silver and copper also pushed to fresh annual highs, which further boosted the mining sector this week.

In the US, a better than expected October reading for pending home sales helped the Dow Jones Industrial Average to close at the highest closing level since October 2008, with all eyes focused on this months non-farm payrolls for further signs of improvement.

However, Australia provided a stark reminder of the policy issues faced by the markets as we move into 2010. The Reserve Bank of Australia (RBA) raised interest rates by 25 basis points to 3.75%, which marked the third month of consecutive tightening. Many analysts are concerned that asset bubbles have started to emerge due to extremely accommodative monetary policy and tightening could initiate a substantial set-back.

Technical analysis shows that the upward trend remains in place. Last weeks low marks a higher low for the blue chip index and if the trend is to continue we would expect to see a fresh high above 5400 by month end. The 61.8% Fibonacci retracement level at 5495 is seen as the next logical target, but could prove to be a tough level break through.

The relative strength index (RSI) has also traded a higher low, which suggests that the buying momentum is slowly building. However, it is worth noting that it remains a long way below its recent highs, even though the index is powering forwards. This divergence is a concern, as it identifies that a rapid change in sentiment remains possible.

In summary, the inherent momentum behind the market remains strong, as global data continues to support the economic recovery. December is generally a positive month in the stock market and there is usually some form of “Santa Claus rally”. However, policy tightening is a growing concern to investors and given the close proximity to major resistance at 5495 I am becoming increasingly cautious of a pull back in the early part of next year.

 The FTSE 100 has experienced one of the sharpest rallies in history, gaining around 55% from its March low. The outlook for 2010 remains uncertain and this sharp rally in global equity markets actually means the downside risk has increased.

The panic caused by Dubai last week provided a real reminder of the fragile state of the world economy. Some fear that this could be the start of further problems, as contagion could affect the credit worthiness of related entities, particularly those that have lent to Dubai World. Furthermore, other countries, such as Greece, Ireland and Iceland that have also borrowed a lot could also come under similar pressure.

Many analysts are also cautious on the prospects for the global economy and believe that further recovery may be limited until unemployment in Western countries starts to fall. In the UK, unemployment currently stands at 2.46 million (7.8%) and is expected to rise next year. Chancellor of the Exchequer Alistair Darling, recently said that unemployment would continue to rise for some time and could reach 3 million in 2010.

In light of the above analysis, I have been focusing on companies that have substantially outperformed the wider market. Experian (Epic: EXPN), the world’s largest credit-checking company, has rallied around 135% from the intraday low seen on the 16th October last year, versus a market performance of 55% across the same period.

The group reported interim results on the 18th November, which showed a 3.5% fall in first half net profit, as earnings from the UK fell and were impacted by the weakening of Sterling, as the company reports in Dollars. Net profit for the six months ended 30th September fell to $249 million from $258 million a year earlier.

First half revenue also declined to $1.87 billion from $2.02 billion previously. The information provider thrives when credit is flowing freely and consumer appetite for loans is strong, which has clearly not been the case recently.

CEO Don Robert remained cautious and said the outlook looks similar to the last few quarters, with modest organic revenue growth seen in the second half. The credit company is also seeking to refinance some of its bank facilities in the next 18 months and may consider a bond issue next year.

Experian currently trades on a costly forward earnings for 2010 of 15.8x, which is up from around 7x a year ago. The group only yields around 2% and very little growth is expected in 2010 and only 8% is forecast in 2011, which makes for a hefty PEG ratio and questions whether the extensive recent share price gains are warranted.



As can be seen from the above chart of Experian the shares have rallied significantly over the past year.

The trend is clearly higher, with both the 50 and 200 day exponential moving averages (EMA) rising sharply. However, major historic resistance is seen at 635p, which provided a stumbling block in 2007 and the shares are now less than 10% away from this pre-credit crunch level.

The growing divergence on the RSI indicates that the buying momentum is diminishing, which also emphasises the possibility of a sharp retracement.

In addition, directors have been selling recently and in light of our earlier analysis of the FTSE 100, I am inclined to suggest the share price is up with events.

At the time of writing the share price is 591p and my short term opinion is negative. Near term targets are seen at 557.5p, 543p and 515p, with a fairly wide stop loss marginally above historic resistance at 643p.



This report was written by Mark Allen – Head of derivatives at Simple Investments Stockbrokers. Neither the writer nor his clients hold a position in Experian. The material in this report has come from Simply Charts and Experian’s corporate website.

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