Dun & Bradstreet on the Wrong Growth Path? Brian Graney (TMF Panic)
August 20, 1999
Investors put shares of Dun & Bradstreet (NYSE: DNB) -- the business information database company and parent of Moody's credit rating agency -- under review for a possible downgrade right out of their portfolios. Last night, the company reported that July revenues and operating income from the U.S. unit of its core Dun & Bradstreet Operating Co. were "substantially" below expectations. As a result, analysts' EPS estimates of $0.40 to $0.41 for Q3 will need to be lowered, and the company sees full-year EPS growing by only 3% to 5%. The market wasn't thrilled by the news, sending the stock reeling.
The news isn't a complete shock, since the operating company portion of the business hasn't been performing well for a few years. The Moody's business, best known for its corporate bond ratings and credit reports used by investors, has been driving the company's growth. Revenues at Moody's have grown by an average rate of 14.6% over the past three years, while the operating company's annual revenues have climbed at a less-than-breathtaking 3.5% average rate. As a result of the contrast, Moody's share of the company's total revenues has been increasing -- up to 30% in Q2, from just 22% of total revenues at the end of 1996.
Still, it's the growth of the lumbering operating company business that really determines the company's overall direction. The operating company, which does mundane tasks such as providing commercial credit reporting and marketing segmentation information, is in the midst of transforming itself into more of a database information company. Partnerships this year with growing enterprise software firms such as Siebel Systems (Nasdaq: SEBL), SAP (NYSE: SAP), and SAS Institute were supposed to expand margins and jump-start earnings growth. It looks like that isn't happening, at least not this year.
The challenge confronting investors looking at Dun & Bradstreet today is this: Will leveraging the company's extensive business information on 50 million companies around the world pan out? Management called the problems at its U.S. unit an "aberration" and said it will reorganize and refocus its sales force. That's a good idea, since it doesn't appear that the sales folks are doing a very good job of peddling the value-added products that the company sees as its growth vehicle for the future. Then again, the problem may be with the newly introduced, value-added products themselves.
Demand for Dun & Bradstreet's traditional transaction-based services seems to be intact, but management has not been very forthcoming with scuttlebutt about acceptance levels following the rollout of the new technology-based packaged products. If it turns out that the expected demand for the new products is not materializing, that's bad news for investors. In fact, at least one analyst has already gone on record as saying that the recent stumbling hearkens back to what was coming out of the company circa late 1980s, when Dun & Bradstreet was a poster child for that decade's value-destroying di-worsification trend.
Dun & Bradstreet's price-to-trailing sales ratio works out to 2.2 after today's drop, which is not bad for a company that sports net margins north of 13%. But with its business model still in transition and its purported growth engine of the future backfiring, investors might want to look elsewhere for value in the market.