Thursday, June 21, 2012

Dun & Bradstreet: Wide Moat, Low Price?

Dun & Bradstreet (DNB) has been discussed on a few value sites in the last couple of years, including Magic Diligence and Gurufocus. As recently noted by Geoff Gannon, however, the company's stock price has taken a recent dive, which could make for a good buying opportunity.

Dun & Bradstreet is in the information business. Businesses want access to the company's data to make decisions like:

What credit limit should I set?
Will this customer pay me on time?
How can I avoid supply chain disruption?

As the market leader in many of the segments in which it operates, Dun & Bradstreet may benefit from a network advantage. Customers want the most complete set of data before they make crucial decisions, so they flock to the company. At the same time, as the revenue leader, Dun & Bradstreet is able to spend the most on data acquisition, licensing and quality to ensure it retains its market-leading position.

The numbers certainly suggest the company has an advantage. Consider the company's gross and operating margins over the last 10 years as compiled in this article.

Furthermore, it appears that the current share price weakness is mostly caused by short-term problems. The company will experience some costs associated with the shutdown of its Chinese B2C business. (Margins for the company are much lower in Asia than they are for the company's other geographic segments.) Revenues for the company's North American risk management segment also dropped at the end of the last quarter, as some customers experiencing weaknesses in their own businesses switched from subscription to metered models, thereby making their costs more variable. If you believe management on this, the issue here is a budget-constrained, cautious customer, not competitive threats causing a loss of pricing power.

Revenue growth has slowed, which may also be contributing to the weakness in the stock price. But the company's advantage will likely allow it to continue to earn strong profits for the foreseeable future, even with low growth. Much of the company's revenue comes from annual subscriptions, with retention rates in the 90% range. Furthermore, capital requirements in this business are low, allowing the company to divert much of its operating cash flow to share buybacks.

As a result, the company's current P/E of 12 may be too low. (Note that the company does have some debt, however, totaling about 3 years worth of earnings. In addition, the company's pension plan is underfunded by about another 1.5 years worth of earnings.) For value investors who prefer buying great companies at fair prices (as opposed to fair companies at great prices), Dun & Broadstreet may be a worthy candidate.

For further discussion of this company's moat, see this article at Magic Diligence.

Disclosure: No position


Paul said...

Hi Saj, I looked at DNB last year when it was trading around $61. My conclusion? This has serious potential for value trap written all over it, and the lure for the trap is this idea that DNB has a moat. It once did, true, but it's getting smaller and smaller each year. Mainly because DNB simply won't reinvest in their core assets. Instead they're playing earnings management games, getting rid of talented employees, and just letting their assets dwindle. Granted, they might surprise with some earnings, exceed expectations, and get a big bump...but this is not a long-term, moat-protected stock. Don't fall for the trap. Feel free to look at my write-up here:



Taylor said...


Page 12-13 of this document describes the switching costs the government would face if they were to cancel their contract with DNB and develop their own identifier system.

A good insight into the company's competitive advantage.

Saj Karsan said...

Hi PaulD, I do agree with you to some extent.

Hi Taylor, thanks that is some insightful stuff!