In this article, let's take a look at Dun & Bradstreet Corp. (DNB, Financial), a $4.21 billion market cap company, which is a worldwide provider of business information and related decision support services and commercial receivables management services.
Little Growth
The company continues with a little revenue growth. It has to focus on expanding its operations in new countries and expanding into new areas domestically. We believe that international sales could offset the domestic operations. The firm is generating good free cash flow, which should be allocated into acquisitions, stock repurchases as well as dividends.
Further, we still believe that Dun & Bradstreet has to focus on its higher-margin businesses. A program was developed to leverage the brand, while having financial flexibility, are two things very important to become a key player in the industry.
The Same Risks
Considering that about 25% of its revenue coming from foreign countries (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%), the company continues to be 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 1.45% and led earnings per share dencreased in the most recent quarter compared to the same quarter a year ago ($1.85 vs $1.87). During the past fiscal year, the company increased its bottom line. It earned $6.56 versus $6.48 in the previous year. This year, Wall Street expects an improvement in earnings ($7.49 versus $6.56).
The gross profit margin is considered high, at 66.34%. But it has decreased from the same period last year. Despite this, the net margin of more than 16% is ranked higher than 91% of the 964 Companies in the Business Services industry.
Finally, let´s see a measure defined by Joel Greenblatt (Trades, Portfolio): the Return on Capital, which he analyzed it 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.
| Ticker | Company | ROC (%) |
| DNB | Dun & Bradstreet | 1029.24 |
| EXPO | Exponent Inc. | 89.51 |
| EFX | Equifax Inc. | 166.03 |
| IHS | IHS Inc. | 112.33 |
| STN | Stantec Inc. | 55.82 |
| Industry Median | 29.02 |
The ROC is higher than 98% of the 967 companies in the industry. Dun & Bradstreet has a current ROC of 1029.24% which is almost 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 15.7x, trading at a discount compared to an average of 34.1x for the industry. To use another metric, its price-to-sales ratio of 2.6x is above the industry average of 1.72x.
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 $16.066, which represents a 10% 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, we still believe that business productivity in the long term will increase and new products and services would come soon.
Further, expanding its footprint via replicating the business model or expanding into new areas domestically should constitute growth drivers for the firm.
The PE relative valuation and the return on capital that significantly exceeds the industry average and make me feel bullish on this stock. Since the last time I recommended this stock six months ago, it yielded about 5% in less than four months.
Hedge fund gurus like Jim Simons (Trades, Portfolio) and John Rogers (Trades, Portfolio) added this stock to their portfolios in the third quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
