2023-07-09 01:07:29 ET
Summary
- Verisk Analytics is a high quality company, and has been priced as such for a long time now.
- The strategic decision to focus solely on insurance again was the right move.
- Despite its quality, the stock is very overvalued, leading to a "hold" rating right now.
Verisk Analytics (VRSK) is an American data analytics firm that specializes in the insurance industry. The company was essentially a creation of the biggest players in the P&C industry in the 70’s. They became an independent, public company in 2009. Below are the results since that point:
dividend channel
One of their more prominent shareholders at the time of the IPO was BRK.A. Being so heavily proportioned to insurance, it was no surprise that BRK had ownership prior to becoming public, but that position was finally closed out by 2018. Below is the return on capital and earnings metrics versus its peers:
Company | Revenue 10-Year CAGR | Median 10-Year ROE | Median 10-Year ROIC | EPS 10-Year CAGR | FCF/Share 10-Year CAGR |
VRSK | 5.9% | 37.7% | 13.6% | 12.1% | 5.8% |
10.5% | 16.9% | 15.9% | 21.9% | 19.3% | |
7.4% | 27.7% | 12.6% | 18.7% | 19.8% | |
10.1% | 76.4% | 24.6% | 20.9% | 12% | |
7.2% | 115.7% | 22.4% | 9.3% | 6.9% |
Capital Allocation
Let’s now look at the cash flows, and how it was allocated over the past decade in USD millions:
Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
EBIT | 614 | 660 | 737 | 768 | 801 | 834 | 697 | 1,038 | 1,001 | 1,407 |
FCF | 361 | 343 | 458 | 390 | 560 | 703 | 740 | 821 | 887 | 784 |
Acquisitions | 1 | 2,942 | 915 | 153 | 704 | 285 | 324 | |||
Dividends | 164 | 176 | 188 | 195 | ||||||
Repurchases | 277 | 778 | 20 | 327 | 276 | 439 | 300 | 349 | 475 | 1,663 |
SBC | 36 | 36 | 45 | 45 | 32 | 39 | 43 | 48 | 56 | 57 |
Debt Repayment | 190 | 340 | 770 | 300 | 250 | 465 | 450 | 350 |
VRSK started paying a dividend in 2019, and has been fairly active on the M&A front. They began a $2.5 billion ASR in March , and shares up over 30% since that point.
Risk
The good news is that fundamental risk is low, the company indeed has a wide moat that can’t be easily crossed. VRSK is a permanent and integral part of the infrastructure of the P&C sector. The problem is that this isn’t news to anyone, and this will probably be baked into the price till the end of time. The decision to focus on its core business was the right thing to do strategically.
Long term debt has been slashed down to a mere $31 million, making balance sheet concerns a non-issue.
This leads to the biggest risk being valuation related, which will be addressed below.
Valuation
First I’ll show the multiples comp, followed by a historical look:
Company | EV/Sales | EV/EBITDA | EV/FCF | P/B | Div Yield |
VRSK | 14.9 | 34.9 | 47.2 | 411.1 | 0.6% |
MSCI | 18 | 29.8 | 39.6 | -41.7 | 1.1% |
FICO | 15.4 | 37.1 | 49.9 | -26.2 | n/a |
SPGI | 11.6 | 29.3 | 48.1 | 3.2 | 0.9% |
MCO | 12.7 | 30.5 | 52.1 | 20.9 | 0.9% |
Right now VRSK is priced similar to its peers, so there is no discount on this basis.
macrotrends macrotrends macrotrends
As we can see, there were certainly periods when the multiples contracted, but this stock will never trade at a multiple that qualifies it as a value stock. We just missed one of these opportunities this year.
I really like the idea of owning a high quality tech company that also pays a dividend, there aren’t that many. But when the quality is obvious, those dividend yields never get very attractive.
Below is a list of large cap tech stocks that pay a dividend, and you can see that none of these can be considered high yield at all:
finviz
I have to admit during the era of low interest rates, I would have liked the concept of getting a 2% or 3% dividend yield on a high quality company like VRSK, when the alternative is to sit in cash and make far less than 1%. In the current environment, we can easily find much higher yields. This makes the dividend portion of your returns less important.
Next is the dcf model, with a fairly optimistic forecast for earnings growth.
moneychimp
In spite of such a forecast, I see the company as being very overvalued. VRSK is definitely high quality and has a wide moat, but its earnings won’t increase indefinitely at this point in its life cycle. The stock isn’t cyclical, but there have been times when the multiples contract and then expand in the shorter term. These will be ideal times to buy shares, but now isn’t one of those times.
Conclusion
VRSK is without a doubt a high quality company, and has beaten the market since IPO. Buffett held shares through the IPO but eventually closed out the position by 2018. The company has refocused on his core business in the insurance industry which was the wise move to make from a strategic point of view.
The quality of the company isn't in question, but the price of the stock definitely is. This is the sole reason for me giving this company a "hold" rating right now. VRSK will never have a single digit P/E and be considered a value stock. There have, however, been periods of shorter term multiple contraction and expansion. There was a good opportunity to invest at a lower multiple earlier this year, but that time is passed, and the stock is definitely overvalued today. If you are a longtime shareholder, now isn't the time to sell though, this winner will keep on winning, it just isn't the time to buy currently.
For further details see:
Verisk Analytics: High Price For A Wide Moat