Innovation In Wealth Management And Climate Solutions Powers Earnings Growth

Key Takeaways

• Expansion in wealth management and private capital solutions supports revenue growth through enhanced client engagement and new product offerings.
  
• Focus on climate solutions and strategic partnerships drives potential for increased profitability as demand for sustainable investing grows.
  
• Subdued demand and prolonged cycles in key segments and client pressure could impact MSCI's revenue growth and sales conversion in the near term.

Catalysts

Provides critical decision support tools and solutions for the investment community to manage investment processes worldwide.

• MSCI's expansion in wealth management, particularly with indices and technology platforms, is expected to support future revenue growth as more content is delivered to wealth managers, enhancing client engagement. This will likely lead to increased subscription and analytics revenue.
  
• The development of private capital solutions, such as MSCI private capital indices, is a strategic focus to capitalize on the growing market for private assets. This could drive future revenue growth via new client wins and an expanded product line, positively impacting earnings.
  
• Commitment to providing climate solutions, like carbon emission data and new MSCI Carbon Project Ratings, anticipates growing demand for high-quality climate data. This is positioned to enhance future revenue growth and profitability as markets shift towards sustainable investing.
  
• Strong momentum in MSCI index-linked ETFs and non-ETF products, with significant cash inflows, supports asset-based fee revenue growth, ensuring a continued positive impact on top-line revenue and earnings.
  
• Leadership changes and strategic partnerships, including with Moody's for ESG coverage, signal an enhanced focus on ESG and Climate, potentially leading to improved sales and higher margins over time as the segment recovers.

MSCI Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming MSCI's revenue will grow by 9.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 43.1% today to 42.2% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $20.2) by about November 2027, up from $1.2 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 38.1x on those 2027 earnings, down from 39.6x today. This future PE is greater than the current PE for the US Capital Markets industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 1.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.93%, as per the Simply Wall St company report.

MSCI Future Earnings Per Share Growth

Risks

• The subdued demand in ESG and Climate is noted as cyclical but potentially prolonged, which could impact revenue growth in these segments.
  
• Asset managers, a key client base, are facing cyclical pressures with tighter budgets and fee compression despite high retention rates, which could affect subscription sales and net margins.
  
• Elevated cancel activity and longer sales cycles are expected to continue, impacting the company's ability to convert sales leads into revenue promptly.
  
• There are signs of a slowdown in non-recurring revenue growth within the Analytics segment, as the company anticipates it to align more closely with run rate growth, potentially affecting short-term earnings.
  
• Despite growth potential in private assets, the company faces pressures from low transaction volumes in real estate, which can hinder revenue growth in the Real Assets business.

Valuation

• The analysts have a consensus price target of $637.54 for MSCI based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $700.0, and the most bearish reporting a price target of just $510.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.6 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 38.1x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $610.53, the analyst's price target of $637.54 is 4.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.