Why IHS Markit’s Stock Looks Fairly Valued After A 55% Rebound

IHS Markit Stock (NYSE: INFO) is a leading provider of information, research, analytics, and technology, with the company’s clients including the world’s major industries, financial markets, and governments. Despite a 55% rise since the March 23 lows of this year, at the current price around $70 per share, we believe the company has reached its near term potential. IHS Markit stock has rallied from $45 to $70 off the recent bottom compared to the S&P which moved 37% over the same time period.  The company’s capex light business model, solid liquidity reserves, as well as a rebound in the oil prices has helped the stock beat overall markets. Moreover, the stock is up 57% from levels seen in early 2018, over two years ago. IHS Markit’s stock has almost reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower than last year.

Some of the stock price rise of the last 2 years is justified by the roughly 23% growth seen in IHS Markit’s revenues from $3.6 billion in 2017 to $4.4 billion in 2019, the effect of which was partially mitigated by a 1.7% reduction in net income margin (which decreased from 11.6% in 2017 to 11.4% in 2019). Taken together, this helped net income increase by 20.6% from $417 million in 2017 to $503 million in 2019. Earnings growth, on a per-share basis, was a bit higher at 21.2% due to a slight decrease in the share count.

Finally, IHS Markit’s P/E multiple grew from 43x at the end of 2017 to 60x by the end of 2019.  While the company’s P/E has now decreased to 56x, it seems to be a bit on the higher end of the spectrum, when the current P/E is compared to levels seen in the past years – P/E of 60x at the end of 2019 and 43x as late as 2017. However, we believe the stock is appropriately priced, given its strong business model and ample cash reserves, and is unlikely to see a significant upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 56% Change In IHS Markit’s Stock Between 2017 And Now?‘ provides the key numbers behind our thinking, and we explain more below.

How Is Coronavirus Impacting IHS Markit’s Stock?

The global spread of coronavirus has affected industrial and economic activity across the world which is likely to adversely impact the company’s revenues across all operating segments, particularly transportation and resource segments. The economic slowdown is likely to reduce expenses by companies across industries globally – considerably hurting the demand for the company’s offerings. The transportation segment, in particular, will also be impacted as the slowdown is adversely affecting the global automobile market. Additionally, the companies will postpone/suspend their spending in a bid to tackle the near-term shock to consumer spending. Nevertheless, the demand for IHS Markit’s financial services will remain upbeat due to increased volatility in the financial markets. In its Q1 earnings (ending February), IHS Markit provided a scenario-based outlook for FY’20 and FY’21 to incorporate the impact of Covid-19 and plummeting oil prices. In the worst-case scenario, the company expects the economic recovery to begin as late as 2021.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus, which set a floor on fear, the market has been willing to look through the current weak period and take a longer-term view. With investors focusing their attention on FY2021 results, the valuations vs historic valuations become important in finding value.

In a separate analysis, we talk about Why IHS Markit’s Stock Has Grown 2.4x To That Of Google’s

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