2023-04-07 03:00:47 ET
Summary
- Clarivate has plummeted over 70% from its all-time high.
- The business has been messy but the new management team is now cleaning things up and the fundamentals remain solid.
- Latest earnings were underwhelming but guidance indicates a slight improvement in revenue for FY23.
- Current valuation is significantly discounted compared to peers.
- I rate the company as a buy.
Investment Thesis
Clarivate ( CLVT ) has performed poorly in the past two years, with the share price down over 70% from its all-time high. The business has been all over the place due to acquisitions, divestments, and management changes. These issues are now being addressed and I believe the massive pullback offers a buying opportunity for investors.
Despite the turbulence, the company's fundamentals remain strong. It operates in attractive end markets and provides highly sticky solutions to customers. The current valuation is also extremely compressed with multiples significantly discounted compared to peers. I believe the current price level should present meaningful upside potential as the business recovers. Therefore I rate CLVT stock as a buy.
Down But Not Out
Clarivate is a London-based information service company that got spun off from media conglomerate Thomson Reuters ( TRI ) in 2016. The company has been through a lot in the past few years. Since 2020, it has acquired three companies, divested two divisions, and appointed a new CEO and chairman. Due to acquisitions, it also stacked up over $5 billion in debt. These changes caused a lot of uncertainties and weighed heavily on its recent performance.
As the CEO transition is completed last year, the management team is now trying to get the company back on track. Through divestitures, the company got rid of non-essential assets and shifted the focus back to its primary markets. The more concentrated focus should improve execution and drive efficiency and growth. It also paid down roughly $500 million in debt through proceeds from divestments and free cash flow, and expects ongoing deleveraging until at least FY25.
Jonathan Gear, CEO, on debt repayment
We divested MarkMonitor, a noncore asset. We used the proceeds, along with our normal cash from operations, to reduce our debt by $500 million and lower our net leverage ratio. This places us in a favorable position to deleverage below 4x by the end of the year.
Despite the recent changes, the company’s fundamentals remain strong. The company operates in compelling markets including Academia & Government, Life Sciences & Healthcare, and Intellectual Property. These markets combined present a SAM (serviceable addressable market) of $25 billion with a growth rate of 6%. They are also non-cyclical industries that offer much better resilience even during economic downturns.
The company also owns best-in-class data and provides mission-critical solutions. For example, it owns over 2 billion citations and 150 million patent documents that offer irreplaceable value to customers. Current customers include blue-chip companies such as Apple ( AAPL ), AbbVie ( ABBV ), and Pfizer ( PFE ). Most of its solutions are delivered via a recurring business model, further improving profitability and stability. I believe the healthy backdrop will provide a solid foundation for growth moving forward.
Clarivate
Financials and Valuation
Clarivate announced its latest earnings last month and the results are underwhelming. The company reported revenue of $675.3 million, up 20.4% YoY (year over year) compared to $560.7 million. However, most of the growth is contributed by the ProQuest acquisition last year. Organic revenue growth was only 0.5% while organic subscription revenue growth was 2.5%. Adjusted EBITDA increased 18.6% YoY from $256.6 million to $304.4 million, mainly attributed to the recent acquisition. The adjusted EBITDA margin was impressive, at 45.1%. Adjusted free cash flow for the year was $521.8 million, up 13.6% YoY compared to $459.4 million. Adjusted net income was $164 million compared to $163.2 million, up 0.5% YoY.
The company also initiated guidance for FY23, which is pretty mixed. It expects revenue growth to be between 2.8% and 3.8%, which represents a slight improvement from 2.6% in the prior year. However, adjusted diluted EPS is expected to be $0.75 to $0.85, which represents a 5% decline at the midpoint. The bottom line is soft as the management is starting to invest more to reaccelerate growth. It is targeting to generate 6% organic revenue growth by FY25 through higher investments and double digits EPS growth through margin expansion. The increase in near-term spending will drag down the bottom line but I believe this is needed and will be worth it in the long run.
After the massive decline, the company’s valuation is now very compressed. It is currently trading at a fwd EV/EBITDA ratio of just 10.7x, which is extremely cheap (I am using the EV/EBITDA ratio as it takes the heavy debt load into account). As shown in the chart below, this is significantly discounted compared to other information services peers such as Thomson Reuters and Equifax ( EFX ). The two companies are trading at a fwd EV/EBITDA of 24.3x and 16.7x, which represent a hefty premium of 127% and 56% respectively. The substantial valuation gap is mainly due to the recent underperformance of Clarivate. But if the company can stick to the plan and starts to regain some momentum, I believe it should see solid upside potential.
Investors Takeaway
I believe Clarivate is a great recovery play. The company has some issues but the new management team seems focused and is already taking action in tackling them. Acquisitions and management changes are all now settled and deleveraging has started. The company’s fundamentals are also solid as it provides essential solutions in large and growing markets. Latest earnings remain soft but guidance is encouraging as revenue growth is starting to edge up. The valuation is extremely discounted and a lot of pessimism is likely priced in, which limits the downside. On the other hand, the upside should be meaningful if the company can company progress forward. I like the risk-to-reward ratio here therefore I rate it as a buy.
For further details see:
Clarivate: A Great Recovery Play