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For risk-tolerant investors, there could be a way to profit from the Equifax data breach

A huge data breach, swirling questions about executives' suspiciously well-timed stock sales, and looming class-action lawsuits have conspired to knock more than 30 per cent off the price of Equifax Inc. stock in just two weeks.

How can you not love a bargain like that?

All right, all right, this stock might not be anyone's idea of an ideal purchase for widows and orphans. But, at today's price, it is a tempting proposition for risk-tolerant investors who are willing to bet on the ability of strategically positioned companies to endure just about any disgrace.

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It's not just Pollyannas who see the case for Equifax. Twelve of 16 analysts who track the U.S. giant continue to rate it as a "buy" despite its current woes, according to Bloomberg. The remaining four analysts call it a "hold." There are no "sell" ratings.

The analysts who like Equifax praise the wide moat around its core business. Along with rivals Experian PLC and TransUnion, Equifax is one of three major credit bureaus, or credit reporting agencies, in North America.

"We still believe the company's entrenched position will allow it to ultimately weather this storm," says Brett Horn, an analyst with Morningstar, who reckons the company's fair value is $122 (U.S.) a share, compared with its current level around $96.

Equifax and the other credit bureaus keep tabs on individual consumers. They collect information and monitor any behaviour that can suggest how likely you are to repay a loan. Among other things, that includes your employment history, your salary and your record of paying bills on time, as well as any bankruptcy filings and court judgments.

The credit bureaus resell this information to other businesses in the form of credit reports or credit scores. Those other businesses use the information in many ways – it can help decide whether you get a loan, are allowed to open an account, or get considered for a job opening.

Love them or loathe them, consumer bureaus are probably vital to the functioning of an economy that runs on large amounts of trust. The Equifax bulls argue that the company's mass of consumer data, accumulated over the course of more than a century, would simply be impossible for rivals or new entrants to replace in any reasonable amount of time.

The credit-bureau industry is a stable oligopoly with high barriers to entry, according to Mr. Horn of Morningstar. He sees that as unlikely to change even if regulators hammer Equifax with massive fines for the data breach, revealed earlier this month, that exposed personal information belonging to 143 million Americans as well as roughly 100,000 Canadians.

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"From a regulatory point of view, we see scope for industry change as limited," Mr. Horn wrote in a research note. Regulators will insist on tougher security measures "but we are skeptical that regulators would, or realistically could, force disruptive change on the industry, given that the credit bureaus serve an essential and irreplaceable function in the consumer lending market."

Not everyone is quite so confident. Brett Huff, an analyst with Stephens Inc., believes Equifax may have to pay fines and other costs related to the data breach that could range into the billions of dollars. He has the equivalent of a "hold" weighting on the stock and a $110 target price.

Even the bulls acknowledge the level of uncertainty has spiked. Among other issues, the U.S. Department of Justice is reported to have launched a criminal probe into whether top executives at Equifax violated insider-trading laws when they sold stock before the company disclosed it had been hacked.

But the biggest question is how much Equifax will have to pay in fines and penalties related to the data breach. The U.S. Justice Department, state governments, banks, shareholders, small business owners and consumers are all likely to demand compensation. Estimates of the total bill start at a couple hundred of million dollars and go upward from there.

Still, the odds appear promising. Mr. Horn at Morningstar says his downside scenario sees Equifax falling to $77 a share. His upside scenario results in a fair value estimate of $169 a share. For investors who are both risk-tolerant and patient, it's a bet worth considering.

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