Verisk (NASDAQ:VRSK) is turning into a extra targeted, pure-play insurance coverage analytics firm, however it’s paying a worth for it within the type of decrease earnings, at the least within the short-term. As a part of this transformation, Verisk bought Wooden Mackenzie to Veritas Capital for $3.1 billion in money, with an extra $200 million in future consideration. The sale is anticipated to shut within the first quarter of 2023. Verisk plans to make use of the proceeds from the sale for share repurchases and debt pay down, and expects the deal to be dilutive to its earnings within the vary of 4% to six%. The corporate is promoting the deal as bringing elevated focus, however we’re not satisfied there was a lot worth, if any, generated for the corporate from the transaction. We’re additionally not satisfied share repurchases add a lot worth at present costs, and decreasing debt may truly make extra sense in our opinion, although it might most likely imply even decrease earnings per share. Nonetheless, by prioritizing decreasing debt the corporate would put together itself ought to a sexy acquisition alternative current itself.
Operationally the corporate seems to be performing comparatively nicely. In the newest quarter the corporate skilled sturdy progress in subscription revenues throughout each underwriting and claims, leading to total natural fixed forex progress of 6.1%. Robust outcomes have been achieved in core underwriting, excessive occasion options, worldwide companies, and newer acquired companies, together with life insurance coverage and specialty enterprise software program options. Transactional revenues grew only one.8% attributable to a decrease degree of storm exercise and headwinds within the private auto underwriting and advertising and marketing companies. These headwinds are more likely to persist for a while. Verisk’s whole income was $745 million, a decline from the prior yr attributable to inclinations and international forex alternate charge headwinds. Web revenue for the corporate decreased 6% to $189 million, and diluted GAAP earnings per share additionally decreased 3% to $1.20.
Verisk is taking actions to enhance its working effectivity, with a goal to ship 300 to 500 foundation factors of margin growth by 2024. This anticipated margin growth with mid to excessive single digit income progress ought to lead to very first rate EPS progress going ahead. Nonetheless, we do not assume that is sufficient to justify the present valuation.
Going again to the sale of Wooden Mackenzie and the way they plan to separate the proceeds between debt pay down and share repurchases, it appeared like administration is planning to spend most of it on share repurchases. They did not share a quantity on the debt pay down goal, aside from stating that there is not any change to their goal leverage vary of 2x to 3x, and that it’s doubtless that the numerous majority can be spend on share repurchases.
It’s attention-grabbing to have a look at the corporate’s current money circulate utilization. One factor to notice is that in the newest quarter it spent extra on share repurchases than it generated in free money circulate. What this implies for traders is that the present share repurchase tempo isn’t sustainable within the long-term. The corporate may additionally think about rising its dividend, which stays fairly modes, if it doesn’t see any engaging acquisitions or inner investments.
In the course of the firm’s most up-to-date earnings name there was an attention-grabbing query concerning income progress, and whether or not the corporate remained assured on its ~7% goal. We additionally ponder whether that’s an attainable purpose, so we have been very curious on the response. In any case, that is what CEO Lee Shavel needed to say about it:
What I’ll first say and reiterate that our confidence in that long-term goal stays in place given what we see because the alternatives in entrance of us. I believe once you have a look at what we have even achieved in 2021 at a tougher setting, the place we had two quarters of natural income progress above 7% clearly demonstrates the power of the insurance coverage – of our insurance coverage enterprise to realize that.
We have had some weak spot associated to pandemic results, resembling decrease driving exercise, affect on staff’ comp. And I believe, to Mark’s feedback, we’re seeing some weak spot on account of the financial setting, however we’re additionally seeing restoration in a number of the pandemic-related results. And I believe that biases us in the direction of stronger efficiency forward from a progress perspective as we come out of a few of these stronger parts.
A number of the macroeconomics could persist, however I believe we’re seeing type of extra momentum in the direction of that focus on forward. That will be the way in which, I believe, about it, each from a longer-term perspective, which we’re nonetheless assured that we will ship on that. We’ve to work our approach by means of, I believe, the conflicting impacts of some restoration from pandemic impacts after which a number of the extra sustained macroeconomic, which, I believe, are of a decrease magnitude than what we skilled by means of the pandemic.
Verisk has a stable stability sheet and an funding grade credit standing, with debt/EBITDA of ~2.1x. The corporate’s whole long run debt is ~$3.4 billion, and its money and short-term investments quantity to ~$276 million.
It does have a major quantity of debt that must be refinanced comparatively quickly, most likely at a lot increased charges. This is likely one of the causes we consider the corporate ought to prioritize debt compensation over share repurchases presently. The opposite cause being that the corporate’s valuation isn’t very engaging in the meanwhile.
Most valuation indicators level to a stretched valuation, resembling an EV/Revenues a number of of ~10x, or a really small dividend yield of solely ~0.67%. One of many engaging issues of Verisk’s enterprise mannequin is that it generates important free money circulate, however sadly the value to free money circulate can be fairly excessive at ~41x, considerably above the ten yr common of ~31x.
The web widespread payout yield, which mixes the dividend yield and the buyback yield, is excessive in the meanwhile, however as we beforehand mentioned, the corporate is shopping for again extra shares than it’s producing in free money circulate.
Even with comparatively optimistic future earnings estimates we solely get a web current worth for the long run earnings stream of ~$138. We subsequently consider shares to be considerably overvalued, and priced to ship solely excessive single digit returns for long-term traders shopping for at present costs.
|EPS||Discounted @ 10%|
|Terminal Worth @ 3% terminal progress||270.40||86.16|
The corporate has the standard dangers related to most corporations, together with regulatory dangers, international forex publicity, and so forth. Nonetheless, these dangers are mitigated by a robust stability sheet, mirrored in an Altman Z-score of ~3.5x, and the corporate’s sturdy aggressive moat. The principle threat we consider traders ought to give attention to is that of the excessive valuation, as we consider shares are at present overvalued.
Verisk’s resolution to promote Wooden Mackenzie for $3.1 billion with a purpose to develop into a extra targeted insurance coverage analytics firm is anticipated to be dilutive to its earnings per share. It stays to be seen if the anticipated advantages from the elevated focus materialize. The corporate’s operational efficiency has been first rate, however we query whether or not the choice to spend a major majority of the gross sales proceeds on share repurchases is the correct one. We consider shares are at present overvalued and priced to ship excessive single digit returns to long-term traders, as such we’re sustaining our ‘Maintain’ ranking.