One of Wall Street's biggest winners of the day is TransUnion, a diversified financial company whose shares have climbed 9.0% to a price of $74.88 -- 14.36% below its average analyst target price of $87.44.
The average analyst rating for the stock is buy. TRU may have outstripped the S&P 500 index by 10.0% so far today, but it has lagged behind the index by 20.7% over the last year, returning 2.0%.
TransUnion operates as a global consumer credit reporting agency that provides risk and information solutions. The company is included in the financial services sector, which includes a wide variety of industries such as credit services, mortgage, banking, and insurance. Owing to this variety and the fast pace of innovation within these industries, investors may struggle to make sense of this sector.
As evidenced by the financial meltdown of 2008, seemingly healthy financial services companies — from insurers to investment banks — may see their market value plunge to zero in a matter of months. While the financial crash was likely a once-in-a-generation event, it highlights the volatility that is inherent to the sector. Financial innovation creates opportunities, but also new types of risk that investors and even the companies themselves may not fully understand.
TransUnion does not release its trailing 12 month P/E ratio since its earnings per share of $-1.06 are negative over the last year. But we can calculate it ourselves, which gives us a trailing P/E ratio for TRU of -70.6. Based on the company's positive earnings guidance of $4.37, the stock has a forward P/E ratio of 17.1.
The P/E ratio is the company's share price divided by its earnings per share. In other words, it represents how much investors are willing to spend for each dollar of the company's earnings (revenues minus the cost of goods sold, taxes, and overhead). As of the first quarter of 2023, the finance sector has an average P/E ratio of 12.38, and the average for the S&P 500 is 15.97.
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
TransUnion's PEG ratio of 1.02 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
TransUnion's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 645,400 | 310,700 | 334,700 | 33570.0 |
| 2022 | 297,200 | 298,200 | -1,000 | -100.17 |
| 2021 | 808,300 | 224,200 | 584,100 | 0.36 |
| 2020 | 787,600 | 205,600 | 582,000 | -1.1 |
| 2019 | 776,900 | 188,400 | 588,500 | 56.68 |
| 2018 | 555,700 | 180,100 | 375,600 |
- Average free cash flow: $410.65 Million
- Average free cash flown growth rate: -7.0 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in TRU have received an annualized dividend yield of 0.6% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts.
TransUnion's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 3, so the company's assets may be overvalued compared to the average P/B ratio of the Finance sector, which stands at 1.58 as of the first quarter of 2023.
With a negative P/E ratio., a higher than Average P/B Ratio, and positive cash flows with a downwards trend, we can conclude that TransUnion is probably overvalued at current prices. The stock presents poor growth indicators because of its weak operating margins with a negative growth trend, and no PEG ratio.
