Tuesday, October 13, 2009

Verisk Analytics

Verisk Analytics had its IPO last week. Barron's mentioned over the weekend: "The company's business bears resemblance to the likes of Visa and the Chicago Mercantile Exchange - once-cooperatively owned, low-capital-intensity, high-margin growth businesses. There are also similarities to current market darling MSCI, a data and risk-modeling leader." What that implies is a biz growing topline in low-double digits and expanding EBITDA margins leading to a high teens EPS growth rate - what Visa and MSCI promise.

Verisk has two segments - Risk Assessment (52% of revs) and Decision Analytics (48% of revs). Decision Analytics is growing much faster. Risk Assessment has grown its topline at 4% over last four years (from $450mn in 2005 to $525mn in 2009E by annualizing 1H09). Decision Analytics, on the other hand, has become 2.5x between 2005 and 2009 (from $197mn in 2005 to $481mn in 2009E by annualizing 1H09). Some part of that growth has come through acquisitions - between Jan 2006 and June 2009, Verisk acquired 10 companies, 9 of which were in Decision Analytics segment.

Now one can focus on the low teen growth rate, high (and expanding) EBITDA margins in the low 40's, and low capex (low single-digit capex-sales) and get excited. But the most crucial element in this story is probably acquisitions.

a) Six month ended June 30, 2009 revs - $503.7mn. Six month ended June 30, 2008 revs - $437.7mn. Increase of 15.1%. Ex acquisitions, rev grew $50mn, or 11.5%. Positive.

b) FY2008 revs - $893.6mn. FY07 revs - $802.2mn. Increase of 11.4%. Ex acquisitions, rev grew $52.8mn, or 6.6%. That's not encouraging.

c) FY2007 revs - $802.2mn. FY06 revs - $730.1mn. Increase of 9.9%. Ex acquisitions, rev grew $24.6mn, or 3.4%. That's definitely not encouraging.

The problem with acquisition led growth is - acquisitions don't come cheap. Verisk acquired a company XactWare in 2006 for $188mn. Additional contingent payments of $98.1mn and $62.9mn were paid in April 2008 and May 2009 as XactWare achieved certain financial results. XactWare had $63mn in revs in 2007 - now its revenue run rate should be $90-100 mn. to have triggered the contingent payments. Clearly, XactWare's performance has been much beyond whatever the initial expectations were - so it is a success. But equally clearly, Verisk has till date been sharing that success. And if an acquisition doesn't succeed, then Verisk shareholders carry the bag.

Can this company grow revs in low double digits on an organic basis? Because if the organic revenue growth is mid-single digits, and the company pays up for acquisitions to get to double digit revenue growth, then that is quite different from what Visa and MSCI are all about. 2009 has so far been a great year on organic revenue growth. But is there something one-off - like a major contract or pricing increase, which will slow down pricing growth in future years?

It is entire possible that under the old structure, the company didn't pass regular price increases to its owner customers. As an independent company, the company will be more focused on profits. So we might see much higher organic revenue and profit growth going forward.

Verisk has around 200mn shares outstanding - 113mn Class A, 67mn class B, and 24mn stock options at strike price of $9.38. At $26, the company is valued at $5.2bn. We don't know the consensus EPS estimates right now. 1H09 PAT was $90mn. This number includes some one-time expenses like IPO expenses and pension costs. Still, it seems like the stock is already valued in the mid 20's multiple on FY09E EPS and low 20's on FY10E EPS.

I doubt that bullish broker reports once the silent period is over will be enough to catapult the stock into the low 30's anytime soon - assuming markets don't rocket another 20% by that time. But it will definitely be a very interesting stock to follow.

Disclosure: No positions in Verisk, but might change at anytime.


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