As U.S. equities remain resilient at record highs mid-earnings season, the events of the last year seems like a distant memory with investors continuing to have the “buy the dip” mentality – even as COVID begins to rear its ugly head once again with the Delta Variant’s potential to curb the economic recovery. However, dig a little deeper and the quiet build-up of corporate debt should be a major concern for investors as they continue to buy growth and value.
As US GDP climbed out from its economic hole by consumer spending at restaurants, resorts, and online retail stores, it is no secret the government stimulus that is fuelling this boom will end soon as the historically cheap rates rise to curb an ever-increasing upward inflation spiral. Looking at the numbers, it is not going to be pretty. The aggressive fiscal and monetary response to the economic effects of the pandemic averted a depression, but it raised debt-to-GDP levels to multidecade highs. Gross domestic product, the broadest measure of economic output, grew 1.6 percent in the second quarter of the year. On an annualized basis, second-quarter growth was 6.5 percent and rebounded faster than the Great Depression. The Treasury Department will begin conducting emergency cash-conservation steps to avoid busting the federal borrowing limit after a two-year suspension of the debt ceiling (which expired at the end of July).
Peter Lynch once said that “Companies that have no debt can’t go bankrupt,” and that veiled warning may come back to haunt many companies because it is not stopping corporations from mimicking the government’s borrowing on record levels. Non-financial companies issued $1.7 trillion of bonds in the U.S. last year, nearly $600 billion more than the previous high. By the end of March, their total debt stood at $11.2 trillion, according to the Federal Reserve, about half the size of the US economy according to an article in the WSJ.
The trick for companies now is to “hope” inflation does not race out of control, productivity increases, their operations become more efficient, and the consumer does not dry up. A tall order.
Credit agencies may be one of the big winners of the post-pandemic build back, as they ride the waves of economic instability and decide which consumers and businesses are worthy of credit lines and extra lending. They wield very real power. For consumers, they dictate mortgage capability, car lease agreements, mobile phone contracts and store credit. But for businesses fighting for a comeback, credit agencies are the last throw of the dice for a much-needed cash injection. As consumers tighten their belts in the post-COVID world, businesses continue to feel the squeeze and there’s speculation it’s going to get harder before it gets better.
Deloitte reported this month that companies needed to borrow to invest in home working and social distancing and, for some luckier businesses, needing to borrow more to expand as the pandemic provided them with fruitful opportunities. They still must pay this money down, of course.
The power of the credit agency has therefore grown to an all-time high, and The Edge (the leading independent research firm specializing in Spinoffs and value catalyst idea generation) thinks stocks in this field are worth watching. One credit agency which has caught The Edge’s attention is Dun & Bradstreet Holdings, Inc. (DNB), a company that offers information on commercial credit as well as reports on businesses and has the information on millions of companies. DNB’s revolutionary data universal numbering system (or DUNS) numbers are intricately linked to the categorization of businesses around the world, and is a starting point when a company is considering conducting business and assessing the risk monitoring the performance of over-stretched and nervous businesses. In 2019, Dun & Bradstreet became a privately held company that was put back onto the market quietly in the middle of 2020.
The stock has drifted, but now may be the time for investors to look at co-investing with the management. CEO Anthony Jabbour (also CEO and board member at major investor Black Knight
As mentioned before, Jabbour is also involved in insider buying over at Black Knight, Inc. (BKI), previously known as Black Knight Financial Services, which is an American corporation that provides integrated technology, services, data and analytics to the mortgage and real estate industries. In December 2018, he purchased 22,140 shares at $45.17; he bought again in November 2019, adding 17,675 shares at $56.65; and bought again at the stock’s pandemic price floor in March 2020, with 11,331 shares at $57.30. Most recently, he bought 13,900 shares at $71.77 on June 2, 2021, the same day he made the above purchase at DNB. BKI’s stock is sitting pretty for him around $82. It is clear he is a believer in the companies he leads. A solid show of faith, and perhaps a nod to a golden future the leadership see in front of them.
Who are these golden boys of the credit world? Founded in 1841, DNB has a long and interesting 179-year history. Beginning as a centralized credit reporting provider, it’s evolved over time to include commercial and business data and analytics, and provides research and insights on global business issues for governments and customers in communications, finance, manufacturing, retail, technology, and telecommunications.
For those focusing on market performance alone, it may not be a stock which looks too enticing. Over the last year, the share price declined 18 percent on a market which returned 35 percent. But as a new listing, it’s got time to prove itself. Plus, DNB is yet to be profitable, so we look to revenue growth as a steer – which was a disappointing 13 percent over the last year. However, early July saw the company announce second quarter 2021 earnings will be released before the market opens on August 3.
Plus, ambitious growth seems to be front and center of its current strategy, with a relocation on the cards and a hefty property investment just announced. DNB paid $76.5 million at the end of June for Town Center Two, its new global headquarters office in Jacksonville, chosen with “growth and sustainability plans” in mind as they pivot operations from Short Hills, New Jersey and seek to hire 500 more people to add to the 6,000 strong workforce.
Lastly, this “‘Special Situation” stock contains a silver lining. Although DNB’s Q2FY21 earnings was in-line with consensus estimates (revenue of $521m compared to the estimated $514m and adjusted EPS at $0.25 compared to the estimate of $0.24), the company has considerably underperformed compared to its Sales and Marketing segment peer ZoomInfo Technologies, Inc. (ZI), where ZI registered a revenue jump of 53%. This is against DNB’s own Sales and Marketing revenue jump of 25.6% to $217.1m, primarily led by its international revenues with organic revenue increasing by 21.5% to $59.6m (a 383% increase on an absolute basis with the acquisition of Bisnode) and North America revenue slipping by 1% to $306m. On the FY21E outlook front, DNB maintained its revenue guidance at $2.1bn to $2.2bn and adjusted EPS in a range of $1.02 to $1.06.
Despite the efforts being made by DNB to chase down revenue growth, the considerable lag compared to its peer (particularly for the Sales and Marketing segment) and the company is not capturing the high growth opportunities in the space. Therefore we believe DNB should pursue the Spinoff of the Sales and Marking Segment as the only way forward.
On the valuation front, DNB’s Sales & Marketing segment’s closest peer ZI is trading at FY22E EV/EBITDA of 45.9x, a considerable 329% premium to the blended DNB multiple of 13.9x. Even after applying a 50% discount to ZI while valuing the S&M segment, The Edge sees significant upside at DNB on a combined basis, with further value expected should they go through with the break-up.