Markit (NASDAQ:MRKT) reported its first set of quarterly results as a publicly traded company this week. While net profits were largely down due to one-time costs related to its IPO, adjusted for this net earnings were largely flat compared to last year.
I like the very fat margins, organic growth trajectory and diversification of the business. As such, shares might fetch a premium valuation despite sluggish conditions in the financial industry, making me a patient buyer at slightly lower levels.
Highlights For The Quarter
Markit posted second quarter sales of $264.6 million, an 11.0% increase compared to the same period last year. Revenues beat consensus estimates at $256.3 million.
Reported earnings dropped by 45% to $29.4 million with diluted earnings being cut nearly in half as well at $0.16 per share. Of course, the company incurred a lot of one-time costs related to its public offering.
Excluding these costs, earnings would have been roughly flat compared to last year. Adjusted earnings, which are a non-GAAP earnings metric, came in at $0.37 per share, thereby beating consensus estimates by four cents.
Looking Into The Performance
The 11% topline growth seems very appealing, yet part of this was aided by non-structural items. Organic growth explained 4.3% of the reported growth, acquisitions another 2.8% while favorable FX rates added another 3.9% to reported topline sales growth.
The company's largest information business posted sales of $122.2 million, a 5.7% improvement compared to last year on positive FX movements and new customer wins.
Growth at the processing business was just 1.9% with revenues advancing to $72.1 million as weaker derivative processing performance hurt sales, offset by foreign exchange movements.
The smaller solutions business is ready to overtake the company's processing business. Its sales rose by 35.7% to $70.3 million driven by new customer wins, fees being based on assets under management and acquisitions.
The company is very profitable, with operating earnings still totaling $42.9 million, or 16.2% of sales. Adding back the $31.3 million in net expenses which were largely related to public offering related costs, operating earnings were $74 million which was in line with last year.
Markit ended the quarter with about $97.5 million in cash and equivalents. Total debt of $583 million was rather sizable, resulting in a net debt position of about $485 million.
With 182.7 million shares outstanding following the public offering, and those shares exchanging hands at $25.50 per share, equity is valued at $4.6 billion. Given the low seasonality of the business, an extrapolation of the past quarter's results makes a billion in revenues quite easily attainable with adjusted earnings of over $200 million being very likely.
I like the forward valuation if shares see a further correction. Shares trade at 4.6 times sales and 23 times annual earnings based on the simple projections above.
Back in June, when the company was sold to the general public, I had a look at the company's prospects. I concluded that I liked shares at the offer price, with shares being offered at $24 per share at the time, as shares jumped towards $27 on their opening day.
I liked the growth of the firm, as well as the diversification in terms of business disciplines and geographical areas. I was impressed with organic growth rates of the business, despite a financial industry still being very much in cost-cutting mode. Of course, the strong multi-year momentum across major asset classes has been very helpful.
This relative strong performance, the very profitable margins and rapid built-up of a dominant name in the industry were main attractions for me at the time of the offering.
I am willing to pay 20 times earnings, a 10-15% premium versus the market valuation given the growth and higher valuation for information providers in general like names as FactSet Research (NYSE:FDS) and Morningstar (NASDAQ:MORN), among others. Combined with $200-$250 million in potential annual earnings, this translates into a $24 price target in my eyes.
I continue to like shares very much at those levels. A slightly bigger correction provides me with the opportunity to pick up some high-quality shares at a fair price.
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