On Ihs Markit Ltd (NYSE: INFO), We give management credit for its transparent and detailed guidance for both FY20 and FY21. In these trying times, investors have focused on companies with rock-solid balance sheets and superior management teams that set clear goals and then meet or exceed them. We believe that IHS is one of those companies. In the face of revenue headwinds, it is cutting costs in order to invest in growth and new initiatives. Even the recent drastic decline in oil prices underscores management’s prescience in diversifying away from the Energy sector over the last several years. The 2018 Ipreo acquisition bolstered the company’s Financial Services segment following the merger of IHS and Markit in 2016. The merger enabled the company to further diversify into the high-margin Financial Markets business (though this segment may itself be volatile, as Ipreo has demonstrated). While FY20 may be a tough year, management expects to return to sustainable adjusted EBITDA/revenue margin expansion of 100 basis points per year, into the mid-40s, in FY21 and FY22.
IHS Markit reported results for fiscal 3Q20 (ended August 31) on September 29. Adjusted EPS rose 15% from fiscal 3Q19 to $0.77, and topped the consensus by $0.08. INFO shares fell 3.3% on September 29. GAAP EPS more than quadrupled to $0.41 from $0.10 in 3Q19. We believe that investors value IHS Markit on adjusted results. Fiscal 3Q revenue fell 3.5% year-over-year to $1.07 billion while organic revenue (i.e., revenue excluding the impact of acquisitions/divestitures) declined 1%. While total recurring revenue rose 1%, nonrecurring revenue fell 26%. The nonrecurring revenue declines were across the board, with Financial Services the only segment reporting a smaller 12% decline. The Resources segment was down 45% and Consolidated Markets & Solutions was off 53%. Adjusted EBITDA rose 7.4% to 486.2 million. As management proactively responded to the COVID-19 crisis with cost cuts. IHS has decided that all of its industry events, including CERA week, will be virtual through 2021. The company will reap obvious savings from the transition of its live industry events to a virtual format, though the impact on revenue is unclear.
EARNINGS & GROWTH ANALYSIS
While the COVID-19 pandemic, combined with the precipitous decline in oil prices, has impacted the company’s results, CEO Lance Uggla continues to look for margin expansion through FY22, driven by cost cuts. Further, management expects EPS growth to accelerate to 13%-15% in FY21 as the economy recovers. Mr. Uggla believes that product innovation could drive organic revenue growth into the high single digits over time, and has even accelerated spending on new product initiatives in FY20, helped by savings from lower event and travel expenses. He is pushing two new product innovations: the so-called Unity Platform and the IHS Markit data lake. Both strategies look to knit together the company’s disparate business units and their incumbent data. The Unity platform, arising from the Transportation segment, combines various automobile forecasting databases into a single platform. The IHS Markit data lake is intended to provide a single platform to access data across the company’s segments. Management expects the data lake to both reduce costs and accelerate new product development. With the IHS/Markit merger, Financial Services became the company’s largest revenue stream at over 40% of revenue. Financial Services revenue is expected to grow in the mid-single digits in FY21 and accelerate to 6%-8% growth in FY21. The Transportation segment has become the company’s second-largest revenue stream at about 28% of total revenue. Transportation revenue had been stunted in FY20 by the falloff in new car sales, though it is now in recovery mode. Management forecasts a low single-digit decline for the full year and a return to 14%-16% growth in FY21.
The boom-and-bust oil price cycle has been repeatedly bust in the last few years, making the Resources segment the company’s problem child. Oil price volatility in 2020 has severely impacted the company’s energy upstream business as oil producers have cut spending while downstream business like chemicals have continued to grow. The company’s upstream energy business now accounts for less than 20% of total company revenue, down from 35% in 2015, as the company has diversified. Management expects Resources revenue to be down in the mid-single digits in FY20 and in the single digits in FY21. IHS Markit completed its acquisition of Ipreo for $1.855 billion in cash on August 2, 2018. Ipreo was another financial services data, workflow, and decision-management analytics provider, similar to Markit. IHS saw Ipreo as complementary to its own financial services business lines. The acquisition expanded IHS’s addressable market, adding Ipreo’s strength in the fast-growing ‘financial alternatives’ sector, including private equity, private debt, and real estate, and providing cross-selling opportunities. IHS completed the integration of Ipreo in FY19.
FINANCIAL STRENGTH & DIVIDEND
The company ended 2Q20 with total debt of $4.96 billion, though only $251 million is due within the next year. The company paused share repurchases due to COVID-19; however, it resumed buybacks with a $200 million ASR (accelerated share repurchase) in August. Management expects to maintain its target gross leverage range of two- to three-times adjusted EBTIDA.
Investors in IHS Markit face a number of risks. Since the company derives a large portion of its revenue from outside the U.S., it is exposed to currency risk, and adverse movements have trimmed revenues from time to time. IHS derives about 13% of its revenue from the UK and therefore is exposed to financial sector risks around Brexit. About 22% of the company’s revenue comes from Energy sector customers. The drastic decline in energy prices in 2015-2016 led energy companies to sharply cut back on exploration and development spending, which has had a long-term negative impact on IHS on both the subscription and nonsubscription sides of its business. The early 2020 energy price collapse has only exacerbated these issues, as management expects energy companies to cut a further 30% from their capital budgets in 2020. It has been management’s strategy to diversify away from the upstream energy business for years due to these issues. The performance of the company’s product lifecycle domain is closely tied to the aerospace, defense, automotive, construction and electronics industries, and could be affected by cyclical swings in these industries. As the U.S. economy experiences COVID-19 induced recessionary forces, the company’s exposure to the automotive sector is a particular risk. Aside from cyclical fluctuations, technological advances or detrimental changes in engineering standards or practices could materially affect the company’s business. Because IHS Markit has been actively engaged in acquisitions, it has a number of business integration projects underway. Its current expansion strategy could cause a material reduction in financial performance if expected results are not realized. The company depends on a number of large and mature industries that are themselves more volatile than average. If management fails to deliver on its sales and profit targets or revises guidance downward, IHS shares could be vulnerable to correction.
IHS Markit Ltd. offers technical information, databases, decision-support tools and related services to governments and companies around the world. About 85% of its revenue comes
from subscription-based products. The company generates about 40% of its revenue outside the U.S.