Why Does S&P Global Want To Buy IHS Markit?
S&P Global (NYSE: SPGI) announced that it would acquire IHS Markit (NYSE: INFO) in a deal that could combine two of the largest financial data providers. The all-stock deal will value IHS Markit at about $44 billion. [1] The deal is likely to close in the second half of 2021, subject to regulatory approval. There’s good reason for S&P’s interest in IHS. The market for financial information has expanded quickly, driven by more complex products and algorithm-driven strategies that have increased demand for data. The global spending on financial market data grew by about 6% in 2019 to about $32 billion, per Burton-Taylor International Consulting. [2] The market has also remained relatively resilient through Covid-19, driven partly by increased market volatility.
While S&P Global derived close to half its revenues from credit rating services in 2019, financial and market information accounted for about 30% of revenue, with the rest of its revenue coming from indices, and energy data. IHS Markit, on the other hand, has doubled down on the financial data space partly via acquisitions, with its Financial Services segment emerging as its largest business, accounting for about 40% of revenue last year. IHS Markit’s core financial information offerings include pricing and reference data for various asset classes, valuation services, and financial indices. A lot of the data IHS gathers is complex (derivatives data such as credit default swaps, for example) and is not easily available, making it valuable for S&P. IHS also offers software platforms – which include tools that banks use to underwrite corporate stock and bond offerings – as well as trade processing, and other related services. IHS’s other segments which such as Energy (which provides data on wells drilled, pricing, pipelines) could be integrated with S&P’s own energy offering, Platts. Overall, the deal would give S&P Global significant scale and a broader array of products, enabling it to take on the likes of Bloomberg LP.
[Updated 11/11/2020] Why Is IHS Markit Stock Soaring?
IHS Markit Stock (NYSE: INFO) is up by about 20% year-to-date and is up about 2x from the lows seen in mid-March, trading at levels of about $91 per share. So what’s driving the run-up in the stock price? Firstly, investors have been doubling down on stocks of asset-light companies with high levels of revenue visibility through the current pandemic and IHS fits the bill with its focus on information services and its largely subscription-based model (about 85% of revenue is recurring). While the pandemic has certainly hurt demand, the long-term picture is unlikely to change for the company, as the information and insights that it provides are unique and valuable to businesses, with switching costs remaining high for most customers.
Secondly, IHS’s financials are also holding up pretty well, despite the pandemic. While Revenues are likely to decline this year, as the company’s Transportation and Resources segments have seen demand fall due to Covid-19 and the related lockdowns, this will be partially offset by growth at the Financial Services business – the company’s largest vertical – which is benefiting from current volatility in the financial markets. The next year should be better, with the company guiding for organic revenue growth of 6% to 8%. IHS Markit’s profitability is also looking good, despite the pandemic. While Revenues will fall this year, EPS is likely to increase driven by significant cost reductions. This should help margins in the long-run, with the company projecting about 100 basis points of margin expansion next year. [3]
See our analysis on Why Has IHS Markit Stock Doubled Since 2017? for more details on how IHS’s Revenues, Margins, and Valuation metrics have trended over the last few years.
[Updated 10/13/2020] After 75% Rally, IHS Markit Stock Looks Settled At $80
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. Following a 75% rise since the March 23 lows of this year, at the current price of around $80 per share, we believe the company has reached its near term potential. IHS Markit stock has rallied from $45 to $80 off the recent bottom compared to the S&P which moved 55% 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 75% from levels seen in early 2018, over two years ago. IHS Markit’s stock has 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. Our dashboard, ‘Why INFO Stock Moved 75%?‘ provides the key numbers behind our thinking, and we explain more below.
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 increased to 62x, it seems to be trading 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. We believe there is a possible downside risk for IHS Markit’s multiple when compared to levels seen over the recent years, and the stock is unlikely to see an upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak.
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, which grew by 4% in its Q3 2020 earnings (ending August) while other segments witnessed a decline in revenues. Moreover, in its Q1 earnings, 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.
The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. 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 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.
What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.
See all Trefis Price Estimates and Download Trefis Data here
What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams
Notes:- S&P Global Nears Deal to Buy IHS Markit for About $44 Billion, The Wall Street Journal, November 30, 2020 [↩]
- Burton-Taylor International Consulting [↩]
- IHS Markit Ltd. (INFO) CEO Lance Uggla on Q3 2020 Results – Earnings Call Transcript, Seeking Alpha [↩]