Verisk: Becoming A Pure Play (NASDAQ:VRSK)

In February of this year, I concluded that shares of Verisk Analytics (NASDAQ:VRSK) were a bit too risky in my analysis. This analysis came after the company announced the sale of its underperforming financial service unit, as streamlined operations could see better execution, desperately needed to maintain its premium valuation.

Data Analytics

Verisk Analytics is a data analytics provider which serves customers being active in insurance, energy and financial service industries. These data and risk assessment solutions enjoy ever-increasing demand, as the solid positioning of the business has been complemented by strong execution and sound capital allocation policies.

The company generates about $3 billion in sales with adjusted EBITDA margins of $1.5 billion coming in a percentage short of the 50% mark, for simply astonishing margins. The company relies heavily on its insurance business, a segment responsible for $2.2 billion in sales from property-specific underwriting, rating models, catastrophe models, among others. This unit is the most profitable as well.

The second segment last year was a $649 million energy segment, providing tools to support decision-making in the oil and gas industry, metals, mining and renewable energies. The unit was a bit less profitable, yet $231 million in EBITDA translated into impressive margin in the mid-thirties.

In 2021, the company has a smaller financial service industry as well. A $143 million revenue contribution and $23 million EBITDA number was both small in terms of sales and low in terms of margins, being far from a core activity.

The company announced the sale of the financial service unit alongside the 2021 results. TransUnion (TRU) has reached a $515 million deal to acquire this unit, at 3.6 times sales and 22 times EBITDA.

I pegged pro forma sales after the divestment at $2.85 billion. The company posted 2021 GAAP operating profits of $1.00 billion and $666 million in net earnings, equal to $4.08 per share, as adjusted earnings came in at $5.31 per share, as neither of these earnings performances should change in a meaningful way following the divestment.

Trading at $180 early this year, I pegged the equity valuation at $29.3 billion, for a $30.8 billion enterprise valuation. This was equal to about 10-11 times sales, 21 times EBITDA and 34 times adjusted earnings. Ending up concluding that Verisk was probably a solid long term play, given its positioning and execution, I had no business getting involved at $180 in February.

Range Bound

Since February, Verisk has been trading in a fairly large range between $160 and $220, currently trading basically unchanged from February at $183, to be more precise. After releasing the 2021 results in February, Verisk announced a bolt-on deal to acquire consumer intelligence leader Infutor in a deal on which few details have been announced, as early in March Canadian-based Opta was acquired. In March, Verisk announced a standstill with D.E. Shaw under the promise of becoming a more streamlined and more profitable business, implicitly already announcing the sale of the energy business.

In May, Verisk announced a 5.3% increase in first quarter sales, a growth pace reported again in the second quarter. With the strong dollar hurting the reported results, revenues were up 3% in the first half of the year to $1.52 billion. The company has seen stronger margin gains with adjusted EBITDA up 3% to $740 million, and adjusted earnings up 19% to $2.88 per share.

The energy segment has seen poor results despite the strong pricing of that sector with revenues down 10% as reported to $288 million, albeit that constant currency growth was up a percent. Adjusted EBITDA was down 12% to $97 million.

Net debt stood at $3.0 billion, very manageable given the $1.5 billion EBITDA run rate as Verisk could use the funds from asset sales to buy back stock. With 159 million shares outstanding, the company now commands a $32 billion enterprise valuation at $183 per share. This means that a 10 times sales multiple, roughly 20 times EBITDA multiple and more than 30 times earnings multiple remains in check.

Streamlining Further

Following the agreement with D.E. Shaw, the company has reached a deal to sell its energy business to Veritas Capital in a deal valued at $3.1 billion in cash, with additional contingent considerations coming in at another $200 million. With revenues trending at just over the half a billion mark, the sales multiple comes in around 6 times. This marks a better multiple than fetched for the financial service unit, but comes at a discount to its own valuation. Based on a run rate of nearly $200 million in EBITDA, those multiples come in around 15-16 times.

The deal will eliminate all net debt, and with the core insurance segment posting EBITDA in excess of $1.3 billion, the business could easily support a similar $3 billion net debt load going forwards. If all funds were used to buy back stock at $180, some 17 million shares could be bought back here. This would be sufficient to buy back about 11% of the shares outstanding, while about 13% in EBITDA would leave the door, as some synergies might be seen from lower centralized costs, making this largely a neutral earnings per share exercise.

This back-of-the-envelope calculation makes me cautious. With earnings trending just shy of $6 per share here, the resulting 30 times earnings multiple feels a bit too rich to me, too rich to get onboard here.