Over the last six months, TransUnion’s shares have sunk to $71.69, producing a disappointing 18.3% loss while the S&P 500 was flat. This may have investors wondering how to approach the situation.
Is there a buying opportunity in TransUnion, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is TransUnion Not Exciting?
Despite the more favorable entry price, we're cautious about TransUnion. Here are three reasons you should be careful with TRU and a stock we'd rather own.
1. Shrinking Operating Margin
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D.
Analyzing the trend in its profitability, TransUnion’s operating margin decreased by 3.1 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 18.7%.
2. Free Cash Flow Margin Dropping
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, TransUnion’s margin dropped by 5 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. TransUnion’s free cash flow margin for the trailing 12 months was 14.5%.
3. Previous Growth Initiatives Haven’t Impressed
Growth gives us insight into a company’s long-term potential, but how capital-efficient was that growth? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).
TransUnion historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 5.8%, somewhat low compared to the best business services companies that consistently pump out 25%+.
Final Judgment
TransUnion isn’t a terrible business, but it doesn’t pass our quality test. Following the recent decline, the stock trades at 14.9× forward P/E (or $71.69 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of our all-time favorite software stocks.
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