Verisk Analytics hosted its investor day in New York City on Thursday. There were no significant surprises, but the event provided a bit of insight into some of the areas of expansion for each of the company’s businesses. For example, in the insurance vertical, management provided more insight into its strategy for growing the company’s underwriting solutions for auto insurers and the international expansion of Xactware.
In the healthcare vertical, management said that it is in discussions with another large health plan (which would be its third one) about joining its pooled data initiative for payment accuracy solutions. That product will not affect near-term revenue much, but it is a potentially valuable long-term development for the company. Management also noted that Verisk powers the analytics that are imbedded in two of the leading private healthcare exchanges. Lastly, Argus’s management team provided better insight into its ability to leverage its unique data into new products such as fraud analytics and media spending analytics.
There also appears to be plenty of room for growth by expanding into new international markets and developing additional targeted predictive models. Overall, we walked away further convinced that Verisk’s unique data and analytics, as well as management’s focus on making the capture of data and development of new innovative analytics the core of its culture, provide a long runway for growth.
Shares of Verisk currently trade at 25 times our 2014 EPS estimate (excluding stock comp and intangible amortization, and factoring in about $0.10 of annual accretion from the EagleView acquisition), which is at the high end of the 20 to 25 times that we normally consider a fair valuation range for information services companies, and slightly above the peer-group average of about 23 times. We continue to believe that the company is positioned to deliver double-digit earnings growth and high returns on capital for a long time. Our long-term thesis continues to be predicated on an expectation for 7% organic growth in the insurance vertical and double-digit growth in the healthcare and Argus businesses.
As this occurs during the next few years, we expect the company’s overall organic growth rate to trend up from 8.3% in 2012 and 8.5% in 2013 toward 9%-10%. Combined with perhaps modest margin improvement and the redeployment of capital into acquisitions and share repurchases, this should support low- to midteens EPS growth over the long term. While the company’s valuation remains somewhat high, we remain confident that Verisk will reliably deliver midteens earnings growth for an extended period, so we believe that shares remain attractive for long-term investors. Our rating thus remains Outperform.
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