Highly Valued IHS Markit Returns To Earth
IHS Markit (NYSE: INFO) might be merged with S&P Global and it might not. That deal is under regulatory scrutiny right now which means investors need to remain wary. The Q3 results were good but marred by a glaring issue that has shares down more than 6% and on the verge of breaking the uptrend.
The problem is FX conversion. IHS Markit is exposed to international markets and FX conversion, as are its two new acquisitions. The company was forced to alter its guidance and for the worse because of this exposure which raises a red flag for the entire market. If FX headwinds are emerging, and it looks like they are because the dollar is trading at a one-year high, we've got another headwind for earnings on top of the global supply chain challenges and inflation and that spells bad news for share prices.
IHS Markit Beats Consensus, Barely
IHS Markit had a good quarter and beat the consensus estimate but the devil is in the details. The company's $1.19 billion in net revenue is up 10.3% over last year and beat the consensus by 85 basis points but MarketBeat.com’s data shows it's only flat sequentially and growth decelerated by 500 basis points. The good news is that, over the past two years, growth is up 6.3% and should continue to grow organically and acquisitions. This quarter's results were driven by a 9% increase in organic sales that were compounded by acquisitions and two purchases have been made in the time since.
On a segment basis, three of the four operating units posted growth over last year with only the Resources segment falling. Sales in the Resources segment fell 1% while sales in the Financial Services segment rose 8%, sales in the CMS segment rose 11%, and sales in the Transportation segment 15%. We're not surprised to see strength in the Transportation segment either, the entire transportation industry just getting hammered be it from chip shortages among OEM manufacturers to high levels of demand and low levels of capacity within the shipping and freight industry.
Moving down to the earnings, the results are equally mixed. The GAAP earnings of $0.40 are down a penny from last year and missed the consensus by $0.12 despite strength on the adjusted level. On an adjusted basis, earnings are up by $0.07 to $0.85 and beat the consensus by $0.02.
Looking forward, the company is expecting strength to continue and is including the impacts of new acquisitions, but there is a big caveat with the guidance. While the company is raising its guidance for revenue and earnings at the operational level, there is a significant headwind in the form of FX present. For that reason, the new midpoint of the guidance is down nearly a full basis point and may fall further as the dollar continues to gain strength. Based on our outlook for inflation we think the dollar is going to go much higher.
The Technical Outlook: IHS Markit Could Break Trend
Shares of IHS Markit have been trending strongly higher since hitting bottom in 2020 but have yet to break the long-term trend. The -6% decline in share prices has the stock trading right at the long-term up trend-line, however, and at risk of making a significant move lower. If this stock cannot regain support near the $114.75 level it could fall below the trend line and come into the purview of the bears. The merger with S&P Global is an all-stock transaction so the valuation is a little tenuous relative to IHS stock price but, in our view, current holders should prepare to see price action fall another 10% to 20%. For everyone else, this looks like a budding opportunity to get into IHS Market at a great price pre-merger or not.
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