VRSK - Verisk: Shares Making A Move Ahead Of May Earnings

2023-04-05 16:50:37 ET

Summary

• The Industrials sector has sunk to fresh multi-month relative lows against the S&P 500.
• I see momentum, though, with one domestic Professional Services firm.
• Verisk features very strong EPS growth through 2025, and the management team announced key targets at its latest Investor Day.

The ISM Manufacturing print this week for the month of March did no favors for those hoping that the economy, on its own, can avoid a recession. The upside, of course, is that softening employment and prices paid figures within the key economic report may help the Fed ease off the brake pedal sooner rather than later. Still, the Industrials sector has now fallen to fresh lows since late October last year as recession jitters continue to plague Wall Street.

I see a bright spot of momentum within the sagging Industrials sector - I have a buy rating on Verisk.

Industrials YoY Relative Strength Cracking

According to Bank of America Global Research, Verisk (VRSK) provides data and decision support solutions to enable customers to better understand and manage risk. Following the sale of its energy business in February 2023, Verisk provides services to insurance markets. As of 2022, customers included the top 100 US P&C insurance providers.

The New Jersey-based $29.5 billion market cap Professional Services industry company within the Industrials sector trades at a high 32.2 trailing 12-month GAAP price-to-earnings ratio and pays a small 0.7% dividend yield, according to The Wall Street Journal.

At its Investor Day last month, the management team announced a goal of 6-8% of organic sales growth in 2025 (versus its prior 7% long-term target) and 7-10% of organic EBITDA growth. The firm may also accelerate some of its investments to gain market share - that will be key to watch in its May earnings release ahead. Another upside catalyst is a newly announced stock buyback program .

On valuation , analysts at BofA see earnings rising at an impressive 7% clip this year, considering the broader earnings recession ongoing. Next year's and 2025's EPS growth is strong in the double digits. The Bloomberg consensus forecast is about on par with what BofA projects. Dividends, meanwhile, are seen as advancing, but the yield should remain low on this high-growth name.

Both VRSK's operating and GAAP P/Es are high, but considering 12% per-share profit growth over the coming three years, the PEG is not astronomical at near 3. The EV/EBITDA ratio is elevated - twice that of the broad market while the firm is free cash flow positive. If we assign a 3.1 forward PEG, assuming my normalized 2.9 PEG conclusion right now, then shares are simply near fair value.

Verisk: Earnings, Valuation, Free Cash Flow Forecasts

Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q1 2023 earnings date of Tuesday, May 9 AMC. The calendar is light on volatility catalysts aside from the reporting date.

Corporate Event Risk Calendar

The Options Angle

Digging into the upcoming earnings report, data from Option Research & Technology Services (ORATS) show a 4.2% expected move post-earnings when analyzing the at-the-money straddle expiring soonest after the May 9 EPS quarterly report.

The stock has a mixed history post-earnings with shares falling in 8 of the past 11 instances while the company's EPS beat rate history is not all that strong. The current option pricing is roughly on par with moves we've seen historically, so the options appear fairly valued at the moment.

VRSK: Modest Earnings Move Implied

The Technical Take

While the stock is near fair value and there is not much to be gleaned from the options situation, I see upside potential on the chart. Notice in the graph below that VRSK has broken out from a symmetrical triangle formation, so there's now an upside-measured move price objective to near $245 -that would be a new cycle high.

Nearer-term, there could be minor resistance at the peak from last August near $207. On the downside, there's ample volume by price in the $167 to $195 range, and shares are just now rallying above the high $180s, which had been an area of selling during rallies in Q4 2022 and earlier this year. Overall, the chart appears bullish.

VRSK: Bullish Breakout with Momentum, $245 Upside Target

The Bottom Line

I am a buy on VRSK. While the valuation is just near fair value, there could be strong upside momentum in the near term.

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