IHS
Markit Ltd. (INFO, $74.79): “The Market Likes Markit”
By:
Manuel Cukaj, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
·
IHS Markit Ltd. (NYSE: INFO) provides analytics, solutions and
critical information for major industries, financial markets and governments.
The company was created in a merger between IHS Inc. and Markit in 2016 and has
become a global leader in its industry.
·
Recent success is based on their
well-diversified global customer base, a solid brand recognition and a
competitive advantage in depth and breadth in their offerings.
·
Future catalysts will be solid business
model with high percentage recurring revenues, growth through M&A, and
margin expansion over time.
·
Risk associated with the investment thesis
are typical M&A risks, volatile non-recurring revenues, and high leverage limiting
future expansion opportunities.
·
Strong hold!
Key
points:
IHS has experienced
strong top line growth in the past years and margins have improved continuously
since the stock has been added to our international portfolio. The reasons for
INFO’s success have been their well-diversified global customer base, a solid
brand recognition and more depth and breadth in their offerings than their
competitors. A range of research analysts and industry experts enables them to
provide quality services across several industries. A close relation to their
customers has helped in building essential long-term relationships, that will
secure market share in the future.
Furthermore, the business
model of the company allows for recurring revenues which are achieved through
subscription contracts and make up 85% of their sales. A high customer
retention rate that is constantly in the low 90%’s and a high cost of switching
for their clients is very supportive of that strategy. Additionally, many of
INFO’s products and services are mission-critical to their customers, while at
the same time, competitors have a hard time replicating them.
Future catalysts that
will drive the value of INFO’s stock will mainly be their M&A activity,
recurring earnings with slightly increasing margins and debt paydown.
Historically, the acquisitions of the company helped foster growth and it is
the hope that this strategy will continue to support the company’s expansion in
the future. Their latest acquisition of
Novation Analytics increases their portfolio offerings by providing software
solutions, data analysis and advisory services to the automotive industry, a
space the company is expanding into. Besides, the company is focusing on
further improving operations and staying financially disciplined to keep the
margin expansion of the past quarters going. Even though INFO missed top line
expectations for the five most recent quarters, they were able to beat EPS
estimates by an average of 6.5% during the same time span. This shows their
successful efficiency improvements and lets investors expect margins to
increase by 100 bps each in the next two years.
Even though there is a
positive outlook and solid drivers for IHS Markit’s future there are main risks
that would change the thesis of this investment. Since an extensive M&A
strategy always involves inherent risks its important to keep an eye on how new
acquisitions play out. The 15% of revenues that are derived from non-recurring
sources can become volatile and impact whether the company will meet the
markets expectations. Multiple missed earnings could make investors afraid and
impact the stock price strongly. Lastly, IHS Markit is highly levered and
paying down that debt will pose an obstacle for future growth and needs to be
considered a serious risk.
What
has the stock done lately?
Since the beginning of
the new year, INFO returned -1.3% compared to the -3.9% return of the MSCI AC
World ex USA. These negative returns are due to the current week’s market
reaction to the international outbreak of the corona virus. Nevertheless, the company revealed their Q4
and annual results for NOV ’19 in January this year and beat EPS expectations
by 6.8%.
Past
Year Performance:
In
the past year INFO’s stock price has shown very bullish growth representing a one-year
return of 41%. Compared to the MSCI AC World ex USA total return of 4% for one
year, IHS Markit strongly outperformed the benchmark and was able to
continuously surprise investors and beat expectations.
Source:
FactSet
My
Takeaway
In the past couple days,
the stock dropped together with the markets as concerns about the corona virus
continue to scare investors. However, we are experiencing and expecting growing
demand for data analytics and solutions in all industries and as financial
services are being disrupted by new fintech companies, there is need for
experienced consultants. Considering the solid business model and strong market
position of IHS Markit, I believe we should hold on to the stock. As long as
the drivers continue to play out and none of the major risks interrupt the
thesis, the stock is well equipped to generate more returns for the AIM
International Equity Fund.
Source:
FactSet
