Top Reasons to Invest in Dun & Bradstreet

In this article, let's take a look at Dun & Bradstreet Corp. (DNB, Financial), a $4.29 billion market cap company, which is a worldwide provider of business information and related decision support services and commercial receivables management services.

A top priority

The company is characterized by generating strong profitability but with a little growth. As a consequence, the new CEO focuses on top-line growth. But this will have consequences on the risk profile of the company because we see limited opportunities to grow.

Those opportunities must be effective; the company should focus on expanding its operations in new countries and expanding into new areas domestically. This is not new, the company´s peers, such as Equifax (EFX, Financial) and Experian (EXPN) have adopted this more aggressive strategy. So, changing from a regional to a global structure will be a great step. Obviously this could hurt the bottom line, due to the investments required. But in the long term they will bring good results.

On top of that, focusing on its higher-margin businesses is crucial as well. Continue making efforts to leverage the brand, while having financial flexibility, are two things very important to become a key player in the industry.

Some risks

Sales in North America accounted for 74% of 2013 revenues, Asia Pacific accounted for 11% and Europe and other international markets accounted for the remaining 15%. So about 25% of its revenue comes from foreign activities, which means that it is exposed to currency risk.

Moreover, the Internet segment is exposed to competition from other sites, some of which offer information for free.

Revenues, margins and profitability

Looking at profitability, revenues slightly increased by 1.7% and led earnings per share decreased in the most recent quarter compared to the same quarter a year ago ($1.35 vs $1.44). The net income decreased by 13.2% when compared to the same quarter one year ago, falling from $57.5 million to $49.9 million.

Finally, let´s see a measure defined by Joel Greenblatt (Trades, Portfolio): the Return on Capital, which he analyzed differently in his book “The Little Book That Still Beats the Market (Little Books. Big Profits).” He defined Return on Capital as EBIT divided by the total of net fixed assets and net working capital.

The formula is: Return on Capital: EBIT/(Net Working Capital + Net PPE – Excess Cash)

So, let´s compare the ROC which is one of the most important measures of the efficiency of a business and should be an important tool for investors.

The ROC is higher than 98% of the 1018 companies in the industry. Dun & Bradstreet has a current ROC of 1074.48% which is the highest in the last 14 years and is also higher than the industry median.

It is very important to understand this metric before investing and it is important to look at the trend in ROC over time.

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 15.8x, trading at a discount compared to an average of 25.8x for the industry. To use another metric, its price-to-sales ratio of 2.68x is above the industry average of 1.48x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $17.311, which represents a 11.7% compound annual growth rate (CAGR).

Final comment

I think this company could become an important player in business-to-business electronic commerce. After significant investment in technology, business productivity in the long term will increase and new products and services will come soon.

The PE relative valuation and the return on capital that significantly exceeds the industry average and make me feel bullish on this stock.

Hedge fund gurus like David Dreman (Trades, Portfolio) and John Keeley (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned