Is FTSE 100 Stalwart Experian Good Value?

LONDON -- Capital appreciation is surely the goal of many investors. One method of achieving that is to buy companies with steady earnings growth. If the shares are bought when cheap, two drivers could move their price up: growth in earnings and an upward P/E rerating.

Highly successful fund manager Peter Lynch classified steady growers as "stalwarts," which he typically traded for 20% to 50% share-price gains. But whether buying for gains like that or holding for the longer term, we need to know whether reliable earnings growth can continue and the shares are cheap.

Seeking durable growth
Not all companies achieve stable growth, as you can see by the aggregate performance of those in London's premier FTSE 100 index, where the compound annual earnings-growth rate has been just 0.7% over the last five years:

Consistent, cash-flow-backed growth in profit is a promising characteristic in today's markets, so for this series, I'm examining firms with annual earnings growth between 4% and 20%.

One contender is Experian (LSE: EXPN.L), which is perhaps best-known for its credit-checking services. This table summarizes the company's recent financial record:

So, earnings have grown at an equivalent 8.2% compound annual growth rate, putting Experian in the stalwart category.

Experian describes itself as the leading global information-services company, providing data and analytical tools to clients around the world. The company employs 17,000 people through offices in more than 44 countries. That said, it derives the largest portion of its revenue from North America at 47%. Brazil provides a further 20%, another 18% comes from the U.K., and the remaining 15% comes from other countries around the world.

After spinning from the GUS group in 2006, Experian has grown its operations in breadth and depth. Of its four principle service categories, credit services are the biggest contributor to the company's revenue, posting 47% last year. Marketing services contributed 21%, consumer services 21%, and decision analytics 11%.

According to today's half-year report, recent trading has been good, and it seems that further earnings growth is in the cards going forward.

Experian's earnings growth and value score
I analyze five indicators to determine whether earnings growth can continue and the shares offer good value:

1. Growth: Revenue, earnings, and cash flow have all been growing steadily. Score: 5/5
2. Level of debt: Net gearing is about 80% with borrowings around 2.8 times earnings. Score: 3/5
3. Outlook and current trading: Good recent trading and a cautiously positive outlook. Score: 4/5
4. Enterprise value to free cash flow: A trailing 21 and above historic growth rates. Score: 2/5
5. Price to earnings: A trailing 21 and above historic growth rates. Score: 2/5

Overall, I score Experian 16 out of 25, which encourages me to believe this stalwart can continue earnings growth that outpaces that of the wider FTSE 100. Compared to the FTSE's price-to-earnings ratio of about 11 and the firm's growth predictions, the shares seem to price the company's prospects fully.

Foolish summary
It seems investors haven't overlooked steady growth in all the firm's desirable metrics. The valuation indicators drag the overall score, suggesting a fully priced company.

Right now, forecast earnings growth is 15% for year ending in March 2014, and the forward P/E ratio is about 17 with the shares at 1,055 pence. Considering that and the other factors analyzed in this article, I think Experian can stay on my watchlist for now.

Experian is one of several stalwarts steadily growing earnings on the London Stock Exchange, each with the potential to deliver significant capital appreciation when purchased at sensible prices. If you, like me, are serious about capital gains, I recommend you now read "Top Sectors for 2012," in which three Motley Fool Share Advisor analysts each study a favorable industry -- and pinpoint a particular share to consider for this year and beyond. You can read "Top Sectors for 2012" today by requesting the report free, but hurry -- it's available for a limited time only.

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