Description

Description

Bearings. Verisk Analytics is the kind of high-quality company that you put on the shopping list and wait until there’s a sale and then be excited to hold it for as long as possible. The major sale occurred two weeks ago but you can still buy it at a 15% discount to its most recent peak. And if this recovery mirrors any of the previous recoveries, we will test recent market lows again a few more times…so this write-up is meant to help you be ready to own Verisk at an attractive price given the quality of its organic growth opportunities, its leading position in its marketing place, differentiated product, and high barriers to entry.

Consensus View. Median sell-side fwd 1 year PT for Verisk is $163/share though this will come down as analysts update their models to reflect a post COVID-19 world. The median fwd 1yr PT for the updated sell-side models is closer to $150/share. Therein lies the opportunity. It’s reasonable to assume VRSK’s 2020 and likely 2021 revenue will be impacted, especially in their energy business, but long-term holders needn’t be concerned. The long-term opportunity remains intact.

Variant Perception:

(1)    The market will look past 2020 numbers and concentrate on 2021 or perhaps even 2022 numbers which means you can own VRSK for 25x ’22 P/E and 18x ’22 EBITDA which are approximately 10-15% discounts to historical 5-year averages.

(2) Stating the obvious, robust data management is only becoming more important to insurance companies as we enter a world with increased climate risks. Given its incumbent position in the P&C insurance space, Verisk has an enormous opportunity to lead in collecting, digesting, and assessing rapidly changing risks due to more volatile weather patterns. This gives Verisk the opportunity to grow at double-digit revenue/EBITDA rates for many years to come. It additionally makes Verisk a likely acquisition target. As an example of what Verisk can do given their incumbent position, during the current COVID-19 crisis, they are offering their OneXperience and ClaimXperience services for free. These platforms allow insurance inspects to inspect homes via video and photographs. It’s very likely that in-home inspections will decline over time as these types of digitally-driven technologies become obvious substitutes for a truck-roll.

Company Description: Verisk is a leading data analytics provider serving customers in insurance, energy and specialized markets, and financial services. Using advanced technologies to collect and analyze billions of records, Verisk draws on unique data assets and deep domain expertise to provide innovations that may be integrated into customer workflows. Verisk offers predictive analytics and decision-support solutions to customers in rating, underwriting, claims, catastrophe and weather risk, natural resources intelligence, economic forecasting, commercial banking and finance, and many other fields.

Valuation:

Verisk has managed to grow revenue and EBITDA between 7-9% organically for the past 15 years demonstrating an ability to increase market penetration, grow wallet size, and pass cost increases through to customers. There is no reason to believe Verisk cannot continue to grow organically at these rates. In 5 years-time, EPS could be $8.5-9.00/share. Assuming 25-27x P/E multiple, there is a 50-75% upside branch in a business-as-usual scenario. Additionally, Verisk’s pure-play position as the best data analytics firm in the P&C insurance space makes them an obvious acquisition target. Imagine how Google or Amazon could combine Verisk’s data with their own to sell you more behavior-guided ads or products.

Key Risks:

Energy business: Verisk’s energy business represents 25% of revenue and 13% of EBITDA. 2020 will be a year to forget in energy no doubt but longer term energy businesses will be looking for ways to maximize existing assets as major capital expenditures on new exploration or hard-to-read reserves will continue to be curtailed.

Debt: At ~3x, Verisk’s debt load is slightly higher than I would like to see heading into a downturn and there are a couple of near term maturities ($450mm in May ’21 and $350mm in Sep ’22). These are manageable but would have liked to see Verisk with more dry powder to spend in the current downturn.

Catalysts:

New product launches

Stabilization of energy business

Legal Disclaimer: This research report expresses my research opinions, which I have based upon certain facts, all of which are based upon publicly available information. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect. This is not investment advice nor should it be construed as such. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. The author and/or his employer has a position in this stock and may trade this stock. This analysis is intended only for VIC members and must not be distributed further.

I do not hold a position with the issuer such as employment, directorship, or consultancy.

I and/or others I advise hold a material investment in the issuer's securities.

Energy business: Verisk’s energy business represents 25% of revenue and 13% of EBITDA. 2020 will be a year to forget in energy no doubt but longer term energy businesses will be looking for ways to maximize existing assets as major capital expenditures on new exploration or hard-to-read reserves will continue to be curtailed. 

Debt: At ~3x, Verisk’s debt load is slightly higher than I would like to see heading into a downturn and there are a couple of near term maturities ($450mm in May ’21 and $350mm in Sep ’22). These are manageable but would have liked to see Verisk with more dry powder to spend in the current downturn.

Legal Disclaimer: This research report expresses my research opinions, which I have based upon certain facts, all of which are based upon publicly available information. Any investment involves substantial risks, including complete loss of capital. Any forecasts or estimates are for illustrative purpose only and should not be taken as limitations of the maximum possible loss or gain. Any information contained in this report may include forward-looking statements, expectations, and projections. You should assume these types of statements, expectations, and projections may turn out to be incorrect. This is not investment advice nor should it be construed as such. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. The author and/or his employer has a position in this stock and may trade this stock. This analysis is intended only for VIC members and must not be distributed further.

I do not hold a position with the issuer such as employment, directorship, or consultancy.

I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

New product launches

Stabilization of energy business