Markit (MRKT) provides financial information services to enhance transparency, reduce risk and improve efficiency of financial markets.
The company has a solid growth and profitable track record, accompanied by a strong competitive position. At levels around the public offer price, I am a buyer in this quality name.
The Public Offering
Markit was founded back in 2003 and has quickly become embedded in the systems of many financial participants. Leading technologies and expertise has created innovative products in many asset classes. Key offerings include pricing, reference data, valuation and trading services used by back-office, traders, portfolio managers as well as all other financial professionals.
Markit aimed to sell 45.7 million shares for $24 apiece, thereby raising $1.1 billion in gross proceeds. Strong demand pushed up the size of the offering to 53.5 million shares, allowing the firm to raise $1.28 billion. As a matter of fact, all the shares were offered by selling shareholders which include banks like Bank of America (NYSE:BAC), Goldman Sachs (NYSE:GS) and J.P. Morgan Chase (NYSE:JPM). No proceeds of the offering will benefit the firm.
While the size of the offering was increased, pricing took place right in the middle of the preliminary offering range of $23 to $25 per share, set by the firm and its bankers.
Shares of the company jumped on its opening day to close the first day of trading at $26.70. At these levels the firm is valued around $4.7 billion.
A whole list of banks aided in the public offering including some of the previous shareholders like Bank of America, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC and J.P. Morgan, among many others. To avoid conflicts between selling shareholders and underwriters, Jefferies was hired as the leading independent underwriter of the deal.
Despite being around for little more than a decade, Markit has over 3,000 customers across the world already. The firm generates roughly half of its revenues in the U.S., 40% in Europe and the remainder in the rest of the world.
The company has three main divisions being the information, processing and its solutions business. Information makes up nearly half of revenues and includes pricing, reference and valuation data. Processing makes up 28% of revenues derived from the processing of OTC derivatives, FX and syndicated loans. Solutions make up little less than a quarter of total revenues and is aimed at the organization, display and analysis of information.
For the year of 2013, Markit generated revenues of $947.9 million which was up by 10.2% on the year before. Earnings attributable to shareholders rose by 11.5% to $139.4 million, as operating earnings were down slightly compared to the year before.
First quarter sales for 2014 were up by 14.1% to $259.4 million. Earnings attributable to shareholders fell from $50.7 million to $39.8 million.
Markit operates with roughly $38 million in cash and equivalents while it operates with a sizable $617 million in total debt. This results in a rather steep net debt position of roughly $580 million.
A $4.7 billion valuation values the company at 5.0 times sales and 33-34 times earnings as reported last year.
As noted above, the public offering of Markit has been a success. While shares were offered at the midpoint of the preliminary offering range, Markit did increase the size of the offering substantially. Shares saw a healthy gain on their opening day.
A strong sign is that while banks are exiting their stakes, other key shareholders are maintaining their stake while the Canada Pension Investment Board aimed to purchase a 10% stake for $450 million in the offering.
The company behind the well known Market CDX and iTraxx indices has become a dominant player in a rather short time, creating real economic moat, competing with the likes of Bloomberg, Reuters and Factset. Besides competition there are other real risks like the reliance on OTC trading which could suffer from increased regulation. Pressure on the financial industry which is in cost cutting mode, reliance on third parties for information and the continued requirements to develop new products are key risks as well.
Note that organic growth was a solid 8.3% in the first quarter, as reported revenue growth of 14.1% was aided by acquisitions. First quarter earnings were impacted by an $11.1 million in IPO preparation charges. Total exceptional charges totaled $60 million, or roughly $40 million on a after tax-basis in 2013. Adjusting for that, earnings would have come in around $180 million last year, valuing Markit at a more acceptable 26 times earnings. Given the continued growth, adjusting earnings could increase in 2014, pushing the earnings multiple to their low twenties.
As such, Markit could be an interesting investment. The company has a good track record, is profitable and has long term investors. I could imagine myself paying 20-22 times earnings for this industry leader, which based upon earnings of $200 million would translate into a $22-$25 price range at which I would be interested in this play.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.