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Morningstar | IHS Markit Posts On-Track 2Q, Leaving Our Outlook Intact; Shares Slightly Rich

Our $55 fair value estimate for wide-moat IHS Markit should not change much after on-track second-quarter results. We still call for mid-single-digit organic revenue growth and adjusted EBITDA margin expansion into the mid-40s (from 39% in fiscal 2018) through fiscal 2023.

In the first half, IHS Markit saw sales of $2.2 billion against a 40% adjusted EBITDA margin. Management reiterated fiscal 2019 guidance of $4.425 billion-$4.50 billion in revenue and $2.52-$2.57 in adjusted diluted earnings per share versus our $4.5 billion and $2.57 respective preannouncement marks, including share buybacks.

Performance was consistent, with the resources, transportation, and financial services units showing 6%, 9%, and 5% respective second-quarter organic revenue growth. Transportation remains a highlight; the second quarter saw an 80-basis-point adjusted EBITDA margin increase to 42.9%, building on a multiyear improvement trend (expanding from 35% in fiscal 2014 to 41% in fiscal 2017-18). We expect further progress, forecasting a 46% adjusted EBITDA margin in fiscal 2023. IHS Markit's balance between the used- and new-car markets (roughly 60% of automotive-related revenue is from the former) should allow it to perform even in a sluggish economy, as its combination of vehicle history reports and advertising tools should help dealers maximize sales and marketing efficiency.

Management discussed its work to streamline IHS Markit’s data streams and offerings across a single platform. Results will take time to become meaningful, but leadership’s indications that the initiative should improve efficiency and new product development strike us as likely, considering the myriad acquisitions that led to the firm’s present configuration. The effort boosts our confidence in IHS Markit’s ability to post mid-single-digit organic growth, with revenue synergies contributing as the company exploits its unique information streams and broad client roster, particularly in financial services.

Management expounded on its May deal to trade most of its technology, media, and telecoms intelligence unit for Informa's Agribusiness Intelligence business and cash considerations. We have a favorable view of the deal and expect the segment to support IHS Markit's capabilities in the chemical market. Leadership indicated that its existing chemical business and the new addition feature similar customer types and needs, and we believe the resulting focus (sharpened by the firm’s simultaneously shedding assets that provided niche capabilities in somewhat far-flung industries) should aid IHS Markit's profitability expansion efforts. We expect the broader resources segment to reach mid-40s EBITDA margins over our five-year explicit forecast, from 42% in fiscal 2018.