The D&B at Neutral - Analyst Blog

The Dun & Bradstreet Corporation (DNB) is currently trading at the low end of its historical range, which is a discount to the industry average. The company is well positioned to benefit from a recovery in the economic environment though we do not expect a strong rebound until 2011.

We advise investors to wait for an attractive entry point and therefore, remain Neutral on the stock, given our long-term confidence about D&B’s growth opportunities.

We feel that the strengthening of business spending will be the main engine of growth this year and acknowledge the current improvements in the overall business environment. However, we would like to see concrete developments before adopting a more positive outlook on the company.

Second Quarter Highlights

On July 29, Dun & Bradstreet reported second quarter 2010 earnings before non-core gains and one-time charges of $1.23 per share, in line with the Zacks Consensus Estimate. Earnings per share increased 1.7% from the year-ago profit of $1.21 per share.

Although D&B’s second quarter 2010 earnings met the Zacks Consensus Estimate, revenues missed the Consensus Estimate.

Total revenue was $397.3 million, below the Consensus Estimate of $411.0 million and down 3% compared with the year-ago quarter. However, management expects revenues to improve in the second half of 2010.

We expect near-term revenues to be pressured due to weakness in North American business and late contract renewals as a result of customer budget deficit.

The International business performed well in the second quarter due to the improving economy and strengthening demand. However, the North American businesses witnessed an uneven recovery, particularly in the Sales & Marketing solution.

Guidance

During the second quarter conference call, D&B reiterated its 2010 guidance. Core revenues are expected to be up 1% to 3%, before the effect of foreign exchange. The company expects sequential improvement in operating income due to its ongoing financial flexibility program.

Growth in earnings per share is expected to be 1% to 6%, before non-core gains and charges. The Zacks Consensus Estimate is pegged at $1.21 per share in earnings for the third quarter of 2010 and $5.56 per share for fiscal 2010.

The company is expected to benefit from its Strategic Technology Investment and new product launches. However, the sale of North America Self Awareness Solutions business could be a drag on revenues.

For 2012, management expects North American revenues to grow in the mid to high-single digit range while International revenues are expected to grow in the low double digit. Overall, the margins are expected to be up 100 basis points over the 2009 level.

Our Take

D&B is a leading provider of business information services such as credit and marketing information in the U.S. to banks and other credit and financial institutions. The company’s important customers include International Business Machines Corp. (IBM), Computer Sciences Corp. (CSC) and ICT Group Inc.

D&B’s high margin business model, significant barriers to entry in the database business, international growth potential, emerging market growth, profitability improvement measures, strategic investments, incremental cost savings and new product pipeline, impressive cash flow and increased payout position it for long-term growth.

However, we remain cautious about the actual benefit extended by ongoing economic developments to the top line, which is not expected to grow much in 2010. Moreover, the recent divestiture and increased investment costs could be a drag on near-term revenues. Additionally, integration related risks and high debts are of concern.

We therefore maintain our Neutral rating over the long term. Currently, the stock has a Zacks Rank of #3, indicating a short-term Hold rating on the stock.