New Highs Are In Sight For IHS Markit LTD (NYSE:INFO)

What? Who?

If you are thinking to yourself, this company sounds familiar but I just can’t place it let me say this… Markit Flash PMI. IHS Markit (NYSE:INFO) is a global data and analytic firm providing economic and investment research on just about anything economic or investment-related. Coincidentally, IHS Markit is also a private corporation and publicly traded. Today IHS Markit released its Q2 results and shares are up 2.0% because of it.

Frankly, the report itself isn’t that great. The company reports revenue fell -9.6%, about 200 basis points more than consensus, and lowered its full-year guidance. On the earnings end, EPS came in a tad bit better than expected but still shows a decline from the previous year. As for guidance, guidance isn’t exactly what you want to see, down from the previously stated range, so why is the stock moving higher?

Shares of IHS Markit are moving higher because the downgrade to guidance was expected. The company lowered its outlook for both revenue and EPS to exactly the range the analysts had been expecting. More importantly, the outlook includes positive EPS growth this year, positive EPS and revenue growth next year, and a two-year net growth rate in the range of 20% for EPS and 4% for revenue. Not too bad considering we’re in the midst of a global economic recession.

Lance Uggla, chairman and chief executive officer at IHS Markit - “Q2 was a challenging quarter due to the COVID-19 pandemic, but I am very pleased with how the organization responded and how we are positioned to deliver strong results in 2020 and beyond,”

Jonathan Gear, chief financial officer at IHS Markit.“We are pleased with the speed and level of cost actions taken in the quarter which will help us to protect profit and deliver earnings growth in 2020 with accelerating growth in 2021,”

The Analysts Are Bullish

The analysts are bullish on this stock and, importantly, have been getting more bullish over the past two months. With the economic rebound underway globally the need for data by governments, businesses, and investors is more important that ever. The average rating is a firm buy, more than half the community is bullish/very bullish, but there are still a few analysts on the sidelines waiting to throw in their support.

The most recent nod comes from Morgan Stanley. Analysts there cited the company’s attractive valuation when they upgraded from neutral to overweight and raise the price target to $70. Notably, the consensus target is closer to $70 so it is possible Markit’s growth outlook is already priced in. The caveat is in the analysts; if the trend of increasingly bullish sentiment continues we can expect to see the price target move higher.

Regarding valuation, it really depends on how you look at it. The stock is trading at 26X its forward earnings which makes it pricey compared to the broad market. When compared to peers within the Industrial Sector it looks fairly valued; when compared with other data/business service companies like Factset Data Systems (NYSE:FDS) at 31X and Market Access Holdings (NASDAQ:MKTX) at 74X forward earnings it is cheap indeed. The salient point is this company will be profitable this year, it will grow earnings this year, and the longer-term growth story is still intact.

And There’s A Dividend

Ironically, IHS Markit decided to initiate a dividend payment late in 2019. The good news is that, unlike so many companies in the market today, the dividend is still safe. At $0.68 annually the yield is pretty low, sub-1%, but the payment is well-covered. The payout ratio for this year is a low 24% and falls to sub-20% based on next year’s consensus figures. The earnings report doesn’t give any indication the payment is in danger, the company has positive free-cash-flow and plenty of cash.

Looking forward, based on the company’s plan to deliver 50-75% of capital capacity to shareholders, there is a good chance we’ll see a distribution increase and/or increase to the buy-back limits. In either case share prices are more likely to move higher than not.

The Technical Outlook: Trying To Break Free

Today’s news has shares of this stock moving higher but, so far, resistance is keeping price action in check. Resistance is at the post-pandemic high and may result in further consolidation at this level. The indicators are set up to fire bullish signals, stochastic already has, so there is an upward bias in the action. If resistance is broken, investors can look forward to a retest of the all-time high, if not new highs. If not, there may be another chance to buy this stock at the $68 to $70 price point.