Verisk: Buy The Dip After Another Year Of Profitable Growth

Summary

• Verisk posted respectable growth across the board, from revenue, via adjusted EBITDA, to EPS and free cash flow.
• The financial performance once again confirms the reliability of its mostly subscription-based revenue and scalability of its business model.
• The company continues to be steadfast in rewarding its shareholders through share buyback and dividend growth.
• The stock may not look cheap; however, should the post-quarterly earnings reporting weakness continue, a buy-the-dip opportunity may be near.
• Looking for a helping hand in the market? Members of The Natural Resources Hub get exclusive ideas and guidance to navigate any climate. Get started today »

On February 18, 2020, Verisk (NASDAQ:VRSK) announced the operational and financial results for 4Q and full-year ended December 31, 2019.

Below, let's have an under-the-hood look at these results in an attempt to shine some new light on the investment thesis previously presented here and here.

Top-line growth

2019 performance. In full-year 2019, Verisk grew the top-line by 6.7% to $2,607.1 million on an organic constant currency basis. Both the insurance and energy segments expanded 7.0%, while the financial services segment increased by 2.9%.

The insurance segment contributed 71.2% of the annual revenue, the energy segments 22.0%, and the financial services segment 6.8% (Table 1).

Table 1. Revenues and revenue growth by business segment in millions. OCC, organic constant currency.

Long-term growth trend. Verisk was able to maintain the growth momentum that has been operative since 2007 (Fig. 1).

Fig. 1. Long-term sustainable growth of Verisk. Note 1, organic growth includes businesses owned for a full year or more at measurement; 2, figures exclude discontinued operations; 3, normalized organic constant currency growth excludes the impact of non-recurring revenue benefits in 2017. Source.

Revenue quality. Verisk continued to have high quality in revenue, as can be seen in that 81% of the sales were derived from subscription-based, recurring sources in 2019. Furthermore, the company generated 77% of the revenue in the U.S. (Fig. 2).

Fig. 2. High-quality recurring revenue across a diversified solution set.

Profitability

Adjusted EBITDA. Verisk grew the adjusted EBITDA to 1,224.1 million, up 8.3%. Please note, the adjusted EBITDA more accurately reflects the state of operations because it takes into consideration the $125 million penalties assessed by the court to EagleView Technologies, being a one-time item (see here).

Table 2. Adjusted EBITDA by year.

The expansion of the adjusted EBITDA falls in the range of growth rate established over the past 13 years, averaging 12% (Fig. 3).

Fig. 3. Profitability growth. Note 1, figures exclude discontinued operations; 2, adjusted EBITDA defined as EBITDA before non-operating acquisition-related costs and non-recurring items.

Adjusted EBITDA margin. The gentle decrease in adjusted EBITDA margin from 2016 onward is a result of the acquisition of new businesses toting slightly lower margins, including Wood MacKenzie (aka WoodMac) and the financial service firms, as I explained in a previous article. Overall, Verisk maintained a high adjusted EBITDA margin in 2019 as adjusted EBITDA continued to rise, which attests to the scalability of its business model (Fig. 4).

Fig. 4. Adjusted EBITDA margin and free cash flow of Verisk. Note 1, figures exclude discontinued operations; 2, adjusted EBITDA defined as EBITDA before non-operating acquisition-related costs and non-recurring items; 3, 2016 free cash flow is normalized for $100M of taxes paid related to the divestiture of the healthcare business.

Free cash flow. Thanks to the extremely low requirement of capital expenditures, Verisk generated an increasing amount of free cash flow as the top-line expanded (Fig. 4). In 2019, the company increased free cash flow by 5.1% to $739.5 million (Table 3).

Table 3. The free cash flow of Verisk by year (upper) and a summary of financial results in millions, except per share amounts (lower).

EPS. Verisk made $4.38 per diluted share on an adjusted basis, an increase of 6.6% over one year ago (Table 3), although in 2019 it came short of the stated long-term financial targets (Fig. 5).

Fig. 5. Long-term financial targets of Verisk.

Investor takeaways

From the above discussions, it can be concluded that Verisk continued to deliver consistent growth in both the top and bottom lines, further proving the advantage of its high-quality revenue, scalability of its business model, and high profitability. The company returned 11.23% in ROIC with a WACC of 5.01%, as of February 28, 2020, showing its competitive edge sustains. The sustainable competitive advantage is the main reason I stay optimistic about the prospect the profitable growth extends into the foreseeable future.

Verisk remains steadfast in rewarding its shareholders:

• The company repurchased approximately 700,000 shares at an average price of $145.07, for a total cost of $100 million in 4Q2019. The company also entered into an additional $50 million accelerated share repurchase agreement, with the associated shares to be delivered and settled in February 2020. As of December 31, 2019, the company had $128 million remaining under its share repurchase authorization. On February 12, 2020, its Board of Directors approved an additional authorization of $500 million.
• On December 31, 2019, Verisk paid a cash dividend of $0.25 per share. On February 12, 2020, the Board of Directors approved an 8% increase in the cash dividend to $0.27 per share, payable on March 31, 2020, to holders of record as of March 13, 2020.

Verisk shares do not look cheap presently, with an EV/EBITDA multiple of 25X and P/E of 38X; however, rarely does such a high-quality and well-followed business become deeply-undervalued. That said, bizarrely enough, the share price of Verisk typically weakens in the wake of quarterly earnings release regardless of the underlying financial performance. The 4Q2019 quarterly earnings reporting indeed triggered a bit of selling. If the share-price weakness turns into a correction, long-term investors may finally get an opportunity to buy the dip (Fig. 6).

Fig. 6. Stock chart of Verisk in logarithmic scale, shown with the date of quarterly earnings. Source.

Analyst’s Disclosure: I am/we are long VRSK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.