CORELOGIC INC CLGX
June 23, 2010 - 10:35pm EST by
Francisco432
2010 2011
Price: 17.95 EPS $1.35 $1.71
Shares Out. (in M): 119 P/E 13.3x 10.5x
Market Cap (in $M): 2,132 P/FCF 10.5x 8.6x
Net Debt (in $M): 539 EBIT 294 345
TEV ($): 2,671 TEV/EBIT 9.1x 7.7x

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Description

 

Thesis summary

I believe CLGX is a classic spin-off opportunity. It is relatively unknown as a recent spinoff, it is a great business, and it is attractively priced off of what I believe are cyclical trough numbers despite significant secular growth prospects at high returns on capital.

FAF was previously written up twice on VIC. I recommend reading those posts for some context and history. FAF is effectively following the FNF playbook of separating information solutions businesses (high quality / high multiple businesses) from the title insurance business (medium quality / low multiple businesses) to unlock shareholder value.  FAF is worth consideration, but I prefer CLGX.

It is my impression that most FAF investors were interested in the title business, and that the valuation was largely book value-driven similar to other title insurance companies as they had the same sell-side analysts. This partially explains why the opportunity is available.

Business Description

CoreLogic has three segments: Business and Information Services (50% of 2009 revenue / 53% of EBITDA), Data and Analytics (35% / 43%), and Employer, Legal and Marketing Services (15% / 4%).

  • (1) Business and Information Services
    • a. Mortgage Origination
      • i. Property tax monitoring
        • 1. Protects lenders against losses resulting from delinquent taxes
        • 2. #1 market share (65% of outsourced)
        • 3. Covers the life of the loan
        • 4. Demand driven by mortgage originations for purchase
      • ii. Flood Zone monitoring
        • 1. Federally mandated
        • 2. Provides lenders a report on a property's flood hazard status as outlined by FEMA
        • 3. Demand driven by mortgage originations for purchase
    • b. Default Services & Technology
      • i. Software and services to mitigate losses on default, manage foreclosures, maintain/sell REO, and process foreclosure claims
      • ii. Property valuation to mortgage lenders via BPOs (broker price opinions) and AVMs (automated valuation models)
      • iii. Demand driven mostly by default (some origination via BPOs and AVMs)
  • (2) Data & Analytics
    • a. Specialty Finance
      • i. Provides merged credit reports - 50% market share
      • ii. Provides lead generation, ID verification, and compliance (significant exposure to auto credit)
      • iii. Realtor Solutions - MLS software with 45% market share
      • iv. Demand driven by home sales and general demand for credit
    • b. Risk & Fraud
      • i. Licenses and analyzes data relating to mortgage securities and loans
      • ii. Risk Management and collateral assessment analytics
      • iii. Database access tools for real estate
      • iv. Demand driven by the amount of outstanding credit and desire for data driven solutions
  • (3) Employer, Legal, and Marketing Services
    • a. First Advantage Employer Services - background checks, drug screening, resume verification
    • b. LeadClick Media - lead generation for credit
    • c. Litigation Consulting - eDiscovery handles recovery, restoration, collection, conversion and aggregation of legal files.
    • d. Based on management commentary, I'd expect this segment to be sold at some point in the next two years. Management has been pretty open about their willingness to shed this business.

For further detail, I recommend reviewing the presentation they did ahead of the spin-off: http://investors.corelogic.com/phoenix.zhtml?c=118425&p=irol-calendarPast.

I would argue that the BIS and D&A segments are great businesses because of their significant barriers to entry, high market shares, and high switching costs, allowing them to generate great returns on capital and sustain high margins. The barriers to entry are the data assets, analytic capabilities and customer relationships. The switching costs of transitioning to a different platform are likely not worth the effort as the products is relatively low cost as a percentage of the product and largely passed on to consumers. I view further bank consolidation as the primary competitive threat as the big four national banks could begin to take more functions in-house. So far, we haven't seen this happen.

Cyclical Headwinds / Secular Tailwinds

Cyclical Headwinds

As with any company near housing, CLGX is facing very strong headwinds. The primary demand driver for tax monitoring and flood zone services (~35% of revenues) is mortgage origination which is abysmal right now as a result of the expiration of the first time home buyer tax credit. Demand was pulled forward from 2010 into 2009, and we are seeing the effects now. As the article below states, mortgage applications have not been this low since February 1997.

http://www.theatlantic.com/business/archive/2010/06/mortgage-purchase-applications-continue-to-plummet/57900/

The time immediately after the expiration of the tax credit will likely be the worst point (anyone close was highly motivated to close ahead of the deadline), but I expect the hangover to continue for at least six months if not longer.

I recommend spending some time on the MBA's website reviewing historical data and outlook, but I would highlight the second link as their forecast for mortgage originations which indicate the mortgage originations for purchases was $1,924B in 2009 and is expected to be $1,442B in 2010. Going out any further is difficult because refinancing volumes are highly dependent on interest rates. If rates stay low or go lower, we'll likely get a small refi boom. If they rise, refis could be terrible.

It's worth noting that the tax monitoring and flood zone businesses recognize revenue over the life of the loan, so there is some smoothing relative to any given year's volume. As the mortgage market (hopefully) rises over time, this makes cash flow stronger than earnings (beyond the amortization discussed later), but can make for lumpy cash flows. My FCFE number used later does not try to anticipate this but rather assumes revenue recognized in a given year = cash received which it will be over time. The company is testing moving towards annual payments to smooth the cash flows.

http://www.mbaa.org/ResearchandForecasts/EconomicOutlookandForecasts

http://www.mbaa.org/files/Bulletin/InternalResource/73093_.pdf

Year

Total ($ Bil)

Purchase

Refi

 

Total

Purchase

Refi

1990

459

389

70

 

 

 

 

1991

563

385

177

 

23%

-1%

153%

1992

893

472

421

 

59%

23%

138%

1993

1020

486

535

 

14%

3%

27%

1994

769

557

211

 

-25%

15%

-61%

1995

640

494

145

 

-17%

-11%

-31%

1996

785

559

225

 

23%

13%

55%

1997

833

590

243

 

6%

6%

8%

1998

1656

795

862

 

99%

35%

255%

1999

1379

878

500

 

-17%

10%

-42%

2000

1139

905

234

 

-17%

3%

-53%

2001

2243

960

1283

 

97%

6%

448%

2002

2854

1097

1757

 

27%

14%

37%

2003

4190

1221

2970

 

47%

11%

69%

2004

2730

1314

1415

 

-35%

8%

-52%

2005

2984

1477

1506

 

9%

12%

6%

2006

2754

1441

1313

 

-8%

-2%

-13%

2007

2515

1224

1290

 

-9%

-15%

-2%

2008

1621

754

866

 

-36%

-38%

-33%

2009

1924

750

1174

 

19%

-1%

36%

2010E

1442

725

717

 

-25%

-3%

-39%

This is partially offset by the windfall business they are getting in the default segment, but across segments, they are clearly net losers from a decline in the mortgage market. However, as the tax credit hangover subsides, CLGX will benefit from the combination of improved originations and still strong default business. Given that delinquency rates are still rising, default operations are likely to remain very busy. Industry checks indicate growth through 2012 (I'm assuming they level out at 2010 levels).

Secular Tailwinds

The primary secular tailwind that CLGX benefits from is the increasing use of data to make credit decisions. This primarily benefits their Risk & Fraud segment where industry checks have generated very positive feedbacks. It typically takes a couple years for bankers to get used to the system and buy into the process, but it materially improves their results and streamlines processes. The company also has the opportunity to create a number of product extensions. One example they like to give is providing mortgage payment and housing value data to credit card issuers. Knowing approximately how much equity a person has in their home, combining it with

Finally, I think they have a great opportunity to expand internationally. The products won't translate perfectly, but many of the products and processes can be adapted from US products much more cheaply than they could be created from scratch. As more of the world uses credit, there will be more credit decisions to be made and more of those decisions are being made with data-driven applications.

Valuation

Below is an excerpt from my model. My 2010 estimates generally mirror management guidance which was provided about a month ago. I believe there is upside to my 2011 estimates from (1) better revenue upside than I have projected, (2) cost savings from integration of JVs, and (3) accretive acquisitions and/or buybacks (I model FCF as reduction in debt).

As you see below, I've adjusted the shares and net debt to reflect recent and future transactions. CLGX issued $250m worth of shares to FAF upon the spin. I estimated the shares using the closing share count on the first day of separate trading. CLGX will also issue 2.5m shares to buy in the remaining minority shareholders of a JV. Finally, CLGX will pay Experian $314m at year end for their stake of the FARES JV.

Most metrics that I think one would care about are listed below. I think the most relevant metric is FCF to equity which I calculate as EBITDA - Change in NWC - Interest Expense - Cash Taxes - Capex.

At the current price of $17.95, I estimate that CLGX is trading at 10.5x / 8.6x (or 9.5% / 11.7% FCF yield) 2010/2011 FCFE. This seems too low for a high quality business that is conservatively financed (1.3x Net Debt / EBITDA including Experian buy-in obligation), is likely at or near a cyclical trough in 2010, and has attractive secular growth opportunities at high returns on capital. Even while throwing off that much FCF, I expect the business to be able to grow the top line organically at a mid-single digit rate and have operating income (and FCFE) grow at a high single digit rate.

FCFE is greater than net income due to the amortization of acquired intangibles. These arose from the purchase of other companies/products, buy-ins of previous stakes, purchases of stakes in JVs, etc. The largest category of intangibles is customer lists - these will not require additional cash outlays to maintain for current products as customer relations/sales functions are on-going.

I have not adjusted the tax rate for cash taxes. However, I do not expect them to pay a full cash tax rate. They have historically been able to defer a significant portion of their taxes. I will leave this as an upside opportunity to my FCFE number.

Shares Now

103.5

 

Debt

625.0

 

Shares issued to FAF

12.78

 

Experian Buy-in

314.0

<< 12/31/2010

CoreLogic Buy-in

2.50

 

Adjusted Debt

939.0

 

Total Shares

118.78

 

Cash

400.0

 

 

 

 

Net Debt

539.0

 

$ of shares to FAF

250

 

Net Debt / EBITDA

1.30x

 

CLGX Share Price

19.56

 

 

 

 

 

 

 

Effective Shares

118.78

 

 

 

 

Stock Price

 $17.95

 

 

 

 

Market Cap

2,132.1

 

 

 

 

Net Debt

539.00

 

 

 

 

Adjusted EV

2,671.1

 

 

 

2007

2008

2009

2010E

2011E

2012E

Revenues

           

Data & Analytics

783.9

732.2

689.1

670.5

724.1

774.8

Risk & Fraud Analytics

429.2

411.8

387.7

408.0

440.6

471.5

Specialty Finance

354.7

320.4

301.4

262.5

283.5

303.3

Business & Info Svcs

842.9

798.0

981.5

970.0

1,023.6

1,068.6

Mortgage Origination Svcs

562.2

429.5

564.5

510.0

563.6

608.6

Default & Technology Svcs

280.7

368.5

417.0

460.0

460.0

460.0

ELMS

380.5

372.6

305.9

303.0

333.3

366.6

Corporate

30.5

8.6

14.0

14.0

14.0

14.0

Total Revenue

2,037.8

1,911.5

1,990.6

1,957.5

2,095.0

2,224.1

 

 

-6.2%

4.1%

-1.7%

7.0%

6.2%

 

           

EBITDA

           

Data & Analytics

194.7

202.4

201.2

176.0

197.4

215.2

Risk & Fraud Analytics

132.6

141.6

129.8

126.0

140.7

154.6

Specialty Finance

62.1

60.8

71.4

50.0

56.7

60.7

Business & Info Svcs

194.2

182.9

245.1

227.5

248.9

262.2

Mortgage Origination Svcs

152.7

129.7

169.1

117.5

138.9

152.2

Default & Technology Svcs

41.5

53.2

76.0

110.0

110.0

110.0

ELMS

77.1

56.2

17.8

42.0

55.6

70.6

Corporate

16.3

8.4

(0.9)

(32.0)

(32.0)

(32.0)

Total EBITDA

482.3

449.9

463.2

413.5

469.9

516.0

 

           

D&A

117.2

122.8

121.2

120.0

125.0

130.0

 

           

EBIT

365.2

327.1

342.0

293.5

344.9

386.0

 

           

Interest Expense

5.4

(4.7)

0.4

18.0

5.9

(9.0)

 

           

EBT

359.7

331.8

341.6

275.5

339.1

395.1

 

           

Taxes

151.1

139.4

143.5

115.7

135.6

158.0

Tax Rate

42%

42%

42%

42%

40%

40%

 

           

Net Income

208.6

192.5

198.1

159.8

203.4

237.0

EPS

$      1.76

$      1.62

$      1.67

$      1.35

$      1.71

$      2.00

 

           

EBITDA

482.3

449.9

463.2

413.5

469.9

516.0

Change in NWC

   

-

-

-

-

Interest Expense

   

(18.0)

(18.0)

(5.9)

9.0

Taxes

   

(143.5)

(115.7)

(135.6)

(158.0)

Capex

   

(77.5)

(77.5)

(80.0)

(80.0)

FCF to Equity

   

224.2

202.3

248.4

287.0

 

           

P / FCFE

   

9.5x

10.5x

8.6x

7.4x

FCF Yield

     

9.5%

11.7%

13.5%

 

           

P/E

10.2x

11.1x

10.8x

13.3x

10.5x

9.0x

 

           

EV / Sales

1.3x

1.4x

1.3x

1.4x

1.3x

1.2x

EV / EBITDA

5.5x

5.9x

5.8x

6.5x

5.7x

5.2x

EV / EBITDA - Capex

   

4.9x

5.4x

4.9x

4.5x

EV / EBIT

7.3x

8.2x

7.8x

9.1x

7.7x

6.9x

EV / FCFE

     

13.2x

10.8x

9.3x

 

           

EBITDA Margin

23.7%

23.5%

23.3%

21.1%

22.4%

23.2%

 

           

 

2007

2008

2009

2010E

2011E

2012E

Revenue Growth

           

Data & Analytics

 

-6.6%

-5.9%

-2.7%

8.0%

7.0%

Risk & Fraud Analytics

 

-4.1%

-5.9%

5.2%

8.0%

7.0%

Specialty Finance

 

-9.7%

-5.9%

-12.9%

8.0%

7.0%

Business & Info Svcs

 

-5.3%

23.0%

-1.2%

5.5%

4.4%

Mortgage Origination Svcs

 

-23.6%

31.4%

-9.7%

10.5%

8.0%

Default & Technology Svcs

 

31.3%

13.2%

10.3%

0.0%

0.0%

ELMS

 

-2.1%

-17.9%

-1.0%

10.0%

10.0%

Corporate

 

-71.7%

61.9%

0.3%

0.0%

0.0%

Total Revenue

 

-6.2%

4.1%

-1.7%

7.0%

6.2%

 

           

EBITDA Margin

           

Data & Analytics

24.8%

27.6%

29.2%

26.2%

27.3%

27.8%

Risk & Fraud Analytics

30.9%

34.4%

33.5%

30.9%

31.9%

32.8%

Specialty Finance

17.5%

19.0%

23.7%

19.0%

20.0%

20.0%

Business & Info Svcs

23.0%

22.9%

25.0%

23.5%

24.3%

24.5%

Mortgage Origination Svcs

27.2%

30.2%

29.9%

23.0%

24.7%

25.0%

Default & Technology Svcs

14.8%

14.4%

18.2%

23.9%

23.9%

23.9%

ELMS

20.3%

15.1%

5.8%

13.9%

16.7%

19.3%

Corporate

53.4%

97.3%

-6.2%

-228.6%

-228.6%

-228.6%

Total EBITDA

23.7%

23.5%

23.3%

21.1%

22.4%

23.2%

 

           

Contribution Margin

 

25.6%

16.8%

150.3%

41.1%

35.7%

Additionally, I think CLGX is attractively priced relative to peers. Analysts have and will likely continue to focus on EBITDA. Should CLGX get a similar multiple to FIS or FISV, the stock would trade at ~$25/share using 2011 estimates. That price would also correspond with a P/FCFE of 12x 2011, a pretty reasonable valuation for a high quality business.

I would also note that neither FIS nor FISV look particularly expensive and FIS recently rejected a buyout offer that equated to ~9.3x 2010 estimates of EBITDA. LPS has significant business overlap with CLGX, but LPS has a heavier default exposure at over 50% while CLGX is roughly 20% default. Given default businesses are closer to peak earnings than trough, it makes sense to apply lower multiples to them. However, CLGX has a much higher exposure to origination, which will likely in 2010 (and if 2010 isn't the trough, the S&P is going much lower).

 

2010E

2011E

Tickers

EV / Sales

EV / EBITDA

EV / EBIT

P / E

P / FCFE

EV / Sales

EV / EBITDA

EV / EBIT

P / E

P / FCFE

FIS

2.5x

8.3x

11.5x

14.1x

12.6x

2.4x

7.6x

10.3x

12.2x

11.1x

FISV

2.6x

8.0x

9.9x

12.2x

10.9x

2.5x

7.6x

9.2x

11.1x

10.5x

LPS

1.7x

6.3x

7.4x

9.5x

9.9x

1.6x

5.8x

6.7x

8.5x

10.7x

VRSK

5.4x

12.2x

14.1x

22.7x

N/A

4.9x

10.9x

12.4x

20.0x

N/A

DNB

2.6x

8.4x

9.7x

13.1x

14.7x

2.5x

8.0x

9.1x

12.0x

14.6x

EXPGY

2.9x

8.9x

11.9x

14.2x

11.8x

2.7x

8.4x

11.2x

13.0x

11.1x

 

                   

Average

3.0x

8.7x

10.7x

14.3x

12.0x

2.8x

8.1x

9.8x

12.8x

11.6x

Median

2.6x

8.3x

10.7x

13.6x

11.8x

2.5x

7.8x

9.8x

12.1x

11.1x

 

                   

CLGX

1.4x

6.5x

9.1x

13.3x

10.5x

1.3x

5.7x

7.7x

10.5x

8.6x

 Estimates for peers used above are FactSet consensus estimates. FWIW, I don't really trust their FCFE numbers, but the rest are checked.

Risks

(1) Mortgage origination being even worse than I expect and not recovering in 2011 (importantly, this business is driven by volume of housing transactions, not price).

(2) Cuomo suit - NY's AG filed suit against CoreLogic, alleging that CLGX's eAppraiseIt unit conspired with Wamu to inflate home values by using a list of pre-approved appraisers. It's unclear to me how exposed CLGX really is to this. As long as the appraisers (pre-approved or not) meet a quality standard, it should be hard to prove CLGX conspired to inflate home values (and even harder to prove they succeeded). It's also pretty difficult to manipulate a market with so motivated of buyers and sellers who should ignore an unreasonable appraisal. I would also add (cynically) that Cuomo is running for governor, so this suit may lose priority as he shifts into the governor's mansion and a new AG looks to distinguish himself from Cuomo. My base case is that they settle this for a modest amount and adjust their business practices in this area, but I am not taking that for granted and will continue to follow up on this.

(3) Further bank consolidation - banks pay in part based on volume with larger originators paying a lower price. If CLGX gets compensated less per transaction on the same number of transactions, this is obviously a negative. Based on my checks, banks are attempting to pass these costs on to customers and are generally not sensitive to pricing because of the low cost (particularly tax and flood).

Spin-off dynamics

(1) Technically, CLGX is the parent from the spin-off. However, I view it as the spin because the name and ticker went with FAF and sell-side coverage has always been from the title insurance angle. I think the shift in coverage will result in multiple expansion at CLGX.

(2) Parker Kennedy remains chairman of both CLGX and FAF. Executives seem to be split about as would be expected. Executives received a comp package upon spin-off.

Catalysts

(1) Analyst coverage - I would expect a number of information services analysts to pick up coverage of the name over the coming weeks and months. Based on the quality of the business and attractive valuation, my guess is that they'll be receptive to the name. Importantly, I think both the sell-side and buy-side will generally be a different group of analysts looking at CLGX than did FAF which was covered by title insurance analysts.

(2) Focus turning to 2011 from 2010 and mortgage market recovery

(3) Resolution of Cuomo lawsuit

(4) Accretive buybacks and/or acquisitions

Catalyst

(1) Analyst coverage - I would expect a number of information services analysts to pick up coverage of the name over the coming weeks and months. Based on the quality of the business and attractive valuation, my guess is that they'll be receptive to the name. Importantly, I think both the sell-side and buy-side will generally be a different group of analysts looking at CLGX than did FAF which was covered by title insurance analysts.

(2) Focus turning to 2011 from 2010 and mortgage market recovery

(3) Resolution of Cuomo lawsuit

(4) Accretive buybacks and/or acquisitions

    sort by    

    Description

     

    Thesis summary

    I believe CLGX is a classic spin-off opportunity. It is relatively unknown as a recent spinoff, it is a great business, and it is attractively priced off of what I believe are cyclical trough numbers despite significant secular growth prospects at high returns on capital.

    FAF was previously written up twice on VIC. I recommend reading those posts for some context and history. FAF is effectively following the FNF playbook of separating information solutions businesses (high quality / high multiple businesses) from the title insurance business (medium quality / low multiple businesses) to unlock shareholder value.  FAF is worth consideration, but I prefer CLGX.

    It is my impression that most FAF investors were interested in the title business, and that the valuation was largely book value-driven similar to other title insurance companies as they had the same sell-side analysts. This partially explains why the opportunity is available.

    Business Description

    CoreLogic has three segments: Business and Information Services (50% of 2009 revenue / 53% of EBITDA), Data and Analytics (35% / 43%), and Employer, Legal and Marketing Services (15% / 4%).

    For further detail, I recommend reviewing the presentation they did ahead of the spin-off: http://investors.corelogic.com/phoenix.zhtml?c=118425&p=irol-calendarPast.

    I would argue that the BIS and D&A segments are great businesses because of their significant barriers to entry, high market shares, and high switching costs, allowing them to generate great returns on capital and sustain high margins. The barriers to entry are the data assets, analytic capabilities and customer relationships. The switching costs of transitioning to a different platform are likely not worth the effort as the products is relatively low cost as a percentage of the product and largely passed on to consumers. I view further bank consolidation as the primary competitive threat as the big four national banks could begin to take more functions in-house. So far, we haven't seen this happen.

    Cyclical Headwinds / Secular Tailwinds

    Cyclical Headwinds

    As with any company near housing, CLGX is facing very strong headwinds. The primary demand driver for tax monitoring and flood zone services (~35% of revenues) is mortgage origination which is abysmal right now as a result of the expiration of the first time home buyer tax credit. Demand was pulled forward from 2010 into 2009, and we are seeing the effects now. As the article below states, mortgage applications have not been this low since February 1997.

    http://www.theatlantic.com/business/archive/2010/06/mortgage-purchase-applications-continue-to-plummet/57900/

    The time immediately after the expiration of the tax credit will likely be the worst point (anyone close was highly motivated to close ahead of the deadline), but I expect the hangover to continue for at least six months if not longer.

    I recommend spending some time on the MBA's website reviewing historical data and outlook, but I would highlight the second link as their forecast for mortgage originations which indicate the mortgage originations for purchases was $1,924B in 2009 and is expected to be $1,442B in 2010. Going out any further is difficult because refinancing volumes are highly dependent on interest rates. If rates stay low or go lower, we'll likely get a small refi boom. If they rise, refis could be terrible.

    It's worth noting that the tax monitoring and flood zone businesses recognize revenue over the life of the loan, so there is some smoothing relative to any given year's volume. As the mortgage market (hopefully) rises over time, this makes cash flow stronger than earnings (beyond the amortization discussed later), but can make for lumpy cash flows. My FCFE number used later does not try to anticipate this but rather assumes revenue recognized in a given year = cash received which it will be over time. The company is testing moving towards annual payments to smooth the cash flows.

    http://www.mbaa.org/ResearchandForecasts/EconomicOutlookandForecasts

    http://www.mbaa.org/files/Bulletin/InternalResource/73093_.pdf

    Year

    Total ($ Bil)

    Purchase

    Refi

     

    Total

    Purchase

    Refi

    1990

    459

    389

    70

     

     

     

     

    1991

    563

    385

    177

     

    23%

    -1%

    153%

    1992

    893

    472

    421

     

    59%

    23%

    138%

    1993

    1020

    486

    535

     

    14%

    3%

    27%

    1994

    769

    557

    211

     

    -25%

    15%

    -61%

    1995

    640

    494

    145

     

    -17%

    -11%

    -31%

    1996

    785

    559

    225

     

    23%

    13%

    55%

    1997

    833

    590

    243

     

    6%

    6%

    8%

    1998

    1656

    795

    862

     

    99%

    35%

    255%

    1999

    1379

    878

    500

     

    -17%

    10%

    -42%

    2000

    1139

    905

    234

     

    -17%

    3%

    -53%

    2001

    2243

    960

    1283

     

    97%

    6%

    448%

    2002

    2854

    1097

    1757

     

    27%

    14%

    37%

    2003

    4190

    1221

    2970

     

    47%

    11%

    69%

    2004

    2730

    1314

    1415

     

    -35%

    8%

    -52%

    2005

    2984

    1477

    1506

     

    9%

    12%

    6%

    2006

    2754

    1441

    1313

     

    -8%

    -2%

    -13%

    2007

    2515

    1224

    1290

     

    -9%

    -15%

    -2%

    2008

    1621

    754

    866

     

    -36%

    -38%

    -33%

    2009

    1924

    750

    1174

     

    19%

    -1%

    36%

    2010E

    1442

    725

    717

     

    -25%

    -3%

    -39%

    This is partially offset by the windfall business they are getting in the default segment, but across segments, they are clearly net losers from a decline in the mortgage market. However, as the tax credit hangover subsides, CLGX will benefit from the combination of improved originations and still strong default business. Given that delinquency rates are still rising, default operations are likely to remain very busy. Industry checks indicate growth through 2012 (I'm assuming they level out at 2010 levels).

    Secular Tailwinds

    The primary secular tailwind that CLGX benefits from is the increasing use of data to make credit decisions. This primarily benefits their Risk & Fraud segment where industry checks have generated very positive feedbacks. It typically takes a couple years for bankers to get used to the system and buy into the process, but it materially improves their results and streamlines processes. The company also has the opportunity to create a number of product extensions. One example they like to give is providing mortgage payment and housing value data to credit card issuers. Knowing approximately how much equity a person has in their home, combining it with

    Finally, I think they have a great opportunity to expand internationally. The products won't translate perfectly, but many of the products and processes can be adapted from US products much more cheaply than they could be created from scratch. As more of the world uses credit, there will be more credit decisions to be made and more of those decisions are being made with data-driven applications.

    Valuation

    Below is an excerpt from my model. My 2010 estimates generally mirror management guidance which was provided about a month ago. I believe there is upside to my 2011 estimates from (1) better revenue upside than I have projected, (2) cost savings from integration of JVs, and (3) accretive acquisitions and/or buybacks (I model FCF as reduction in debt).

    As you see below, I've adjusted the shares and net debt to reflect recent and future transactions. CLGX issued $250m worth of shares to FAF upon the spin. I estimated the shares using the closing share count on the first day of separate trading. CLGX will also issue 2.5m shares to buy in the remaining minority shareholders of a JV. Finally, CLGX will pay Experian $314m at year end for their stake of the FARES JV.

    Most metrics that I think one would care about are listed below. I think the most relevant metric is FCF to equity which I calculate as EBITDA - Change in NWC - Interest Expense - Cash Taxes - Capex.

    At the current price of $17.95, I estimate that CLGX is trading at 10.5x / 8.6x (or 9.5% / 11.7% FCF yield) 2010/2011 FCFE. This seems too low for a high quality business that is conservatively financed (1.3x Net Debt / EBITDA including Experian buy-in obligation), is likely at or near a cyclical trough in 2010, and has attractive secular growth opportunities at high returns on capital. Even while throwing off that much FCF, I expect the business to be able to grow the top line organically at a mid-single digit rate and have operating income (and FCFE) grow at a high single digit rate.

    FCFE is greater than net income due to the amortization of acquired intangibles. These arose from the purchase of other companies/products, buy-ins of previous stakes, purchases of stakes in JVs, etc. The largest category of intangibles is customer lists - these will not require additional cash outlays to maintain for current products as customer relations/sales functions are on-going.

    I have not adjusted the tax rate for cash taxes. However, I do not expect them to pay a full cash tax rate. They have historically been able to defer a significant portion of their taxes. I will leave this as an upside opportunity to my FCFE number.

    Shares Now

    103.5

     

    Debt

    625.0

     

    Shares issued to FAF

    12.78

     

    Experian Buy-in

    314.0

    << 12/31/2010

    CoreLogic Buy-in

    2.50

     

    Adjusted Debt

    939.0

     

    Total Shares

    118.78

     

    Cash

    400.0

     

     

     

     

    Net Debt

    539.0

     

    $ of shares to FAF

    250

     

    Net Debt / EBITDA

    1.30x

     

    CLGX Share Price

    19.56

     

     

     

     

     

     

     

    Effective Shares

    118.78

     

     

     

     

    Stock Price

     $17.95

     

     

     

     

    Market Cap

    2,132.1

     

     

     

     

    Net Debt

    539.00

     

     

     

     

    Adjusted EV

    2,671.1

     

     

     

    2007

    2008

    2009

    2010E

    2011E

    2012E

    Revenues

               

    Data & Analytics

    783.9

    732.2

    689.1

    670.5

    724.1

    774.8

    Risk & Fraud Analytics

    429.2

    411.8

    387.7

    408.0

    440.6

    471.5

    Specialty Finance

    354.7

    320.4

    301.4

    262.5

    283.5

    303.3

    Business & Info Svcs

    842.9

    798.0

    981.5

    970.0

    1,023.6

    1,068.6

    Mortgage Origination Svcs

    562.2

    429.5

    564.5

    510.0

    563.6

    608.6

    Default & Technology Svcs

    280.7

    368.5

    417.0

    460.0

    460.0

    460.0

    ELMS

    380.5

    372.6

    305.9

    303.0

    333.3

    366.6

    Corporate

    30.5

    8.6

    14.0

    14.0

    14.0

    14.0

    Total Revenue

    2,037.8

    1,911.5

    1,990.6

    1,957.5

    2,095.0

    2,224.1

     

     

    -6.2%

    4.1%

    -1.7%

    7.0%

    6.2%

     

               

    EBITDA

               

    Data & Analytics

    194.7

    202.4

    201.2

    176.0

    197.4

    215.2

    Risk & Fraud Analytics

    132.6

    141.6

    129.8

    126.0

    140.7

    154.6

    Specialty Finance

    62.1

    60.8

    71.4

    50.0

    56.7

    60.7

    Business & Info Svcs

    194.2

    182.9

    245.1

    227.5

    248.9

    262.2

    Mortgage Origination Svcs

    152.7

    129.7

    169.1

    117.5

    138.9

    152.2

    Default & Technology Svcs

    41.5

    53.2

    76.0

    110.0

    110.0

    110.0

    ELMS

    77.1

    56.2

    17.8

    42.0

    55.6

    70.6

    Corporate

    16.3

    8.4

    (0.9)

    (32.0)

    (32.0)

    (32.0)

    Total EBITDA

    482.3

    449.9

    463.2

    413.5

    469.9

    516.0

     

               

    D&A

    117.2

    122.8

    121.2

    120.0

    125.0

    130.0

     

               

    EBIT

    365.2

    327.1

    342.0

    293.5

    344.9

    386.0

     

               

    Interest Expense

    5.4

    (4.7)

    0.4

    18.0

    5.9

    (9.0)

     

               

    EBT

    359.7

    331.8

    341.6

    275.5

    339.1

    395.1

     

               

    Taxes

    151.1

    139.4

    143.5

    115.7

    135.6

    158.0

    Tax Rate

    42%

    42%

    42%

    42%

    40%

    40%

     

               

    Net Income

    208.6

    192.5

    198.1

    159.8

    203.4

    237.0

    EPS

    $      1.76

    $      1.62

    $      1.67

    $      1.35

    $      1.71

    $      2.00

     

               

    EBITDA

    482.3

    449.9

    463.2

    413.5

    469.9

    516.0

    Change in NWC

       

    -

    -

    -

    -

    Interest Expense

       

    (18.0)

    (18.0)

    (5.9)

    9.0

    Taxes

       

    (143.5)

    (115.7)

    (135.6)

    (158.0)

    Capex

       

    (77.5)

    (77.5)

    (80.0)

    (80.0)

    FCF to Equity

       

    224.2

    202.3

    248.4

    287.0

     

               

    P / FCFE

       

    9.5x

    10.5x

    8.6x

    7.4x

    FCF Yield

         

    9.5%

    11.7%

    13.5%

     

               

    P/E

    10.2x

    11.1x

    10.8x

    13.3x

    10.5x

    9.0x

     

               

    EV / Sales

    1.3x

    1.4x

    1.3x

    1.4x

    1.3x

    1.2x

    EV / EBITDA

    5.5x

    5.9x

    5.8x

    6.5x

    5.7x

    5.2x

    EV / EBITDA - Capex

       

    4.9x

    5.4x

    4.9x

    4.5x

    EV / EBIT

    7.3x

    8.2x

    7.8x

    9.1x

    7.7x

    6.9x

    EV / FCFE

         

    13.2x

    10.8x

    9.3x

     

               

    EBITDA Margin

    23.7%

    23.5%

    23.3%

    21.1%

    22.4%

    23.2%

     

               

     

    2007

    2008

    2009

    2010E

    2011E

    2012E

    Revenue Growth

               

    Data & Analytics

     

    -6.6%

    -5.9%

    -2.7%

    8.0%

    7.0%

    Risk & Fraud Analytics

     

    -4.1%

    -5.9%

    5.2%

    8.0%

    7.0%

    Specialty Finance

     

    -9.7%

    -5.9%

    -12.9%

    8.0%

    7.0%

    Business & Info Svcs

     

    -5.3%

    23.0%

    -1.2%

    5.5%

    4.4%

    Mortgage Origination Svcs

     

    -23.6%

    31.4%

    -9.7%

    10.5%

    8.0%

    Default & Technology Svcs

     

    31.3%

    13.2%

    10.3%

    0.0%

    0.0%

    ELMS

     

    -2.1%

    -17.9%

    -1.0%

    10.0%

    10.0%

    Corporate

     

    -71.7%

    61.9%

    0.3%

    0.0%

    0.0%

    Total Revenue

     

    -6.2%

    4.1%

    -1.7%

    7.0%

    6.2%

     

               

    EBITDA Margin

               

    Data & Analytics

    24.8%

    27.6%

    29.2%

    26.2%

    27.3%

    27.8%

    Risk & Fraud Analytics

    30.9%

    34.4%

    33.5%

    30.9%

    31.9%

    32.8%

    Specialty Finance

    17.5%

    19.0%

    23.7%

    19.0%

    20.0%

    20.0%

    Business & Info Svcs

    23.0%

    22.9%

    25.0%

    23.5%

    24.3%

    24.5%

    Mortgage Origination Svcs

    27.2%

    30.2%

    29.9%

    23.0%

    24.7%

    25.0%

    Default & Technology Svcs

    14.8%

    14.4%

    18.2%

    23.9%

    23.9%

    23.9%

    ELMS

    20.3%

    15.1%

    5.8%

    13.9%

    16.7%

    19.3%

    Corporate

    53.4%

    97.3%

    -6.2%

    -228.6%

    -228.6%

    -228.6%

    Total EBITDA

    23.7%

    23.5%

    23.3%

    21.1%

    22.4%

    23.2%

     

               

    Contribution Margin

     

    25.6%

    16.8%

    150.3%

    41.1%

    35.7%

    Additionally, I think CLGX is attractively priced relative to peers. Analysts have and will likely continue to focus on EBITDA. Should CLGX get a similar multiple to FIS or FISV, the stock would trade at ~$25/share using 2011 estimates. That price would also correspond with a P/FCFE of 12x 2011, a pretty reasonable valuation for a high quality business.

    I would also note that neither FIS nor FISV look particularly expensive and FIS recently rejected a buyout offer that equated to ~9.3x 2010 estimates of EBITDA. LPS has significant business overlap with CLGX, but LPS has a heavier default exposure at over 50% while CLGX is roughly 20% default. Given default businesses are closer to peak earnings than trough, it makes sense to apply lower multiples to them. However, CLGX has a much higher exposure to origination, which will likely in 2010 (and if 2010 isn't the trough, the S&P is going much lower).

     

    2010E

    2011E

    Tickers

    EV / Sales

    EV / EBITDA

    EV / EBIT

    P / E

    P / FCFE

    EV / Sales

    EV / EBITDA

    EV / EBIT

    P / E

    P / FCFE

    FIS

    2.5x

    8.3x

    11.5x

    14.1x

    12.6x

    2.4x

    7.6x

    10.3x

    12.2x

    11.1x

    FISV

    2.6x

    8.0x

    9.9x

    12.2x

    10.9x

    2.5x

    7.6x

    9.2x

    11.1x

    10.5x

    LPS

    1.7x

    6.3x

    7.4x

    9.5x

    9.9x

    1.6x

    5.8x

    6.7x

    8.5x

    10.7x

    VRSK

    5.4x

    12.2x

    14.1x

    22.7x

    N/A

    4.9x

    10.9x

    12.4x

    20.0x

    N/A

    DNB

    2.6x

    8.4x

    9.7x

    13.1x

    14.7x

    2.5x

    8.0x

    9.1x

    12.0x

    14.6x

    EXPGY

    2.9x

    8.9x

    11.9x

    14.2x

    11.8x

    2.7x

    8.4x

    11.2x

    13.0x

    11.1x

     

                       

    Average

    3.0x

    8.7x

    10.7x

    14.3x

    12.0x

    2.8x

    8.1x

    9.8x

    12.8x

    11.6x

    Median

    2.6x

    8.3x

    10.7x

    13.6x

    11.8x

    2.5x

    7.8x

    9.8x

    12.1x

    11.1x

     

                       

    CLGX

    1.4x

    6.5x

    9.1x

    13.3x

    10.5x

    1.3x

    5.7x

    7.7x

    10.5x

    8.6x

     Estimates for peers used above are FactSet consensus estimates. FWIW, I don't really trust their FCFE numbers, but the rest are checked.

    Risks

    (1) Mortgage origination being even worse than I expect and not recovering in 2011 (importantly, this business is driven by volume of housing transactions, not price).

    (2) Cuomo suit - NY's AG filed suit against CoreLogic, alleging that CLGX's eAppraiseIt unit conspired with Wamu to inflate home values by using a list of pre-approved appraisers. It's unclear to me how exposed CLGX really is to this. As long as the appraisers (pre-approved or not) meet a quality standard, it should be hard to prove CLGX conspired to inflate home values (and even harder to prove they succeeded). It's also pretty difficult to manipulate a market with so motivated of buyers and sellers who should ignore an unreasonable appraisal. I would also add (cynically) that Cuomo is running for governor, so this suit may lose priority as he shifts into the governor's mansion and a new AG looks to distinguish himself from Cuomo. My base case is that they settle this for a modest amount and adjust their business practices in this area, but I am not taking that for granted and will continue to follow up on this.

    (3) Further bank consolidation - banks pay in part based on volume with larger originators paying a lower price. If CLGX gets compensated less per transaction on the same number of transactions, this is obviously a negative. Based on my checks, banks are attempting to pass these costs on to customers and are generally not sensitive to pricing because of the low cost (particularly tax and flood).

    Spin-off dynamics

    (1) Technically, CLGX is the parent from the spin-off. However, I view it as the spin because the name and ticker went with FAF and sell-side coverage has always been from the title insurance angle. I think the shift in coverage will result in multiple expansion at CLGX.

    (2) Parker Kennedy remains chairman of both CLGX and FAF. Executives seem to be split about as would be expected. Executives received a comp package upon spin-off.

    Catalysts

    (1) Analyst coverage - I would expect a number of information services analysts to pick up coverage of the name over the coming weeks and months. Based on the quality of the business and attractive valuation, my guess is that they'll be receptive to the name. Importantly, I think both the sell-side and buy-side will generally be a different group of analysts looking at CLGX than did FAF which was covered by title insurance analysts.

    (2) Focus turning to 2011 from 2010 and mortgage market recovery

    (3) Resolution of Cuomo lawsuit

    (4) Accretive buybacks and/or acquisitions

    Catalyst

    (1) Analyst coverage - I would expect a number of information services analysts to pick up coverage of the name over the coming weeks and months. Based on the quality of the business and attractive valuation, my guess is that they'll be receptive to the name. Importantly, I think both the sell-side and buy-side will generally be a different group of analysts looking at CLGX than did FAF which was covered by title insurance analysts.

    (2) Focus turning to 2011 from 2010 and mortgage market recovery

    (3) Resolution of Cuomo lawsuit

    (4) Accretive buybacks and/or acquisitions

    Messages


    SubjectEBITDA - Capex
    Entry06/23/2010 11:32 PM
    MemberFrancisco432
    This calculation is wrong because of the double negative. Please ignore that multiple. I'll respond with the correct multiples when i'm back at the office (it's in between the EV / EBITDA and EV / EBIT since capex is less than d&a). I apologize for the mistake.

    SubjectRE: EBITDA - Capex
    Entry06/24/2010 08:51 AM
    MemberFrancisco432
    The corrected EV / EBITDA - Capex should read: 6.9x / 7.9x / 6.9x / 6.1x for 2009 - 2012. I view this as equivalent to EV / EBIT since they have significant amortization that does not have an associated cash replacement cost as discussed in the write-up.

    SubjectRE: RE: RE: EBITDA - Capex
    Entry06/24/2010 10:13 AM
    MemberFrancisco432
    Nails -
    You're correct that I largely used mgmt guidance for 2010. I think I said that in my write-up under the valuation section. I don't feel I have any better insights into their business near term than they do and that the opportunity is driven more by a shift in the investor base than numbers being too low.
    Good catch on my 2009 numbers. I apologize. However, 2010 and beyond should be correct in that it incorporates a new corporate overhead line, and 2010/2011 are the drivers of my valuation.
    Thanks for the feedback.

    SubjectRE: RE: RE: RE: RE: EBITDA - Capex
    Entry06/24/2010 11:16 AM
    Memberzzz007
    Nails,
     
    I'm interested in your source for the $400-$430mm EBITDA number for 2010 not being inclusive of corporate o/h.  When I spoke to the company about this, I didn't get a definitive answer back (am still waiting for confirmation), so am just wondering what you may have heard, and who you may have heard it from.
     
    Thanks,
    zzz

    SubjectRE: RE: RE: RE: RE: RE: EBITDA - Capex
    Entry06/24/2010 12:03 PM
    Memberzzz007
    Answering my own question...
     
    Just heard back from the company.  Nails is correct that the $400-430mm guidance does not include corporate OH.

    SubjectRE: RE: RE: RE: RE: RE: RE: EBITDA - Capex
    Entry06/24/2010 12:17 PM
    MemberFrancisco432
    I'm going to follow up with the company because that is not what I was told nor what they said at the analyst day (see below).
    From page 27 of the streetevents transcript for the analyst day:
    "Forecast for the origination market in 2010 is $1.3 trillion. We're down 40% from 2009 level. Now despite that down drift, you can see on this slide that we are expecting revenues of $1,850 million to $1,950 million, down only single digits and EBITDA of $400 million to $430 million and that's after about $30 million in new corporate costs. So how do we get there?"

    SubjectRE: RE: RE: RE: RE: RE: RE: RE: EBITDA - Capex
    Entry06/24/2010 12:50 PM
    MemberFrancisco432
    Sorry for the multiple posts. I spoke to the company again. $400-430 is the correct number on a pro forma basis. The approximately $40m of additional expense is corporate expense from FAF for the first five months of the year (pre-spin) that is not part of CLGX on a go-forward basis. CLGX must report this because it is technically the parent and bore the expense for the first part of the year.

    SubjectRE: RE: RE: RE: RE: RE: RE: RE: RE: EBITDA - Capex
    Entry06/24/2010 01:10 PM
    Memberzzz007
    Francisco,
     
    My apologies.  I just reread the email from the company I received today in light of your comments and you are correct.  The $400-$430mm EBITDA guidance DOES include corporate level expense.  So, that is a representative of the new company on a standalone basis.
     
    Thanks,
    zzz

    SubjectRE: : EBITDA - Capex
    Entry06/24/2010 02:15 PM
    MemberFrancisco432
    I think the difference is that 463 was a summation of segment ebitda (not including the 45m of old overhead). As you can see in my model above (and you correctly pointed out), i did not allocate them any corporate overhead in 2009, but I did allocate them 32m in 2010.
    Therefore, my model (and the company) is saying that Segment ebitda is falling about $50m on an apples-to-apples basis. This equates to a roughly 56% contribution margin which lines up with company commentary that margins on incremental business are over 50%.
    Hope that helps.

    SubjectRE: big picture
    Entry06/25/2010 10:01 PM
    MemberFrancisco432
    duff,
     
    I appreciate the feedback/criticism. I think this is the right intermediate to long term question, and I have put significant thought into this because I'm as bearish economically as the next guy who reads the WSJ. I have a couple responses.
     
    First, the boys from Omaha own a collection of businesses that have varying degrees of economic sensitivity (including housing--bricks and wallboard no less). However, they bought them at attractive prices and largely avoided the catastrophic mistakes--bad businesses, excessive leverage, bad management, overpaying, etc. They also own a number of companies that will do dramatically worse than CLGX if interest rates go materially higher (how do you think WFC's second lien book is going to perform?). I think this is a good business with a good balance sheet that is attractively priced relative to alternatives for explainable reasons.
     
    Second, this investment has much more exposure to housing transactions (a toll road if you like) than housing values (I wasn't sure what you meant by 'housing market bottoming'). The sensitivity to interest rates is limited but the exposure to the general trend of credit transactions is higher. Approximately 35% of their business is variable (though smoothed through revenue recognition which is over the course of the life of the loan in tax monitoring and flood zone). However, of the variable portion, the majority is driven by household formation rather than interest rates (refis) which should grow with population growth over time. The larger secular issue in my opinion is adoption of data-driven solutions. I think this at least offsets long term refi compression concerns and is priced in at less than 11x cash eps. I would add that I am short home furnishing retailers against this (see my LZB write-up) which have worse business models, worse balance sheets, weaker cash flows, more operating leverage to housing and higher valuations.
     
    So, yes, I'm scared about housing, interest rates, jobs, gdp, the budget, taxes, regulation, etc, but I think this represents an attractive investment despite those factors. Price is the great equilibrator.

    SubjectRE: RE: : EBITDA - Capex
    Entry06/27/2010 09:34 AM
    MemberFrancisco432
    Nails,
     
    I understand your concern, but note that EBITDA in Mortgage Origination and Specialty Finance are projected to be down substantially as you would expect. These are simply offset by Default Services experiencing continued improvement from the lag effect of delinquencies/foreclosures and significant cost reductions at ELMS.
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