Thursday, March 19, 2020

A Current AIM International Equity Holding: IHS Markit Ltd. (INFO, $74.79): “The Market Likes Markit”

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.


·         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