Subscription Growth And Calculated Client Engagement Drive Future Earnings Optimism

Key Takeaways

• Verisk's shift to subscription models and cost efficiency measures indicate a positive outlook for revenue consistency and margin expansion.
  
• Investments in innovation and strategic client engagements suggest potential for expanded future revenue through enhanced product offerings and enterprise-wide opportunities.
  
• Shifts to subscription models, unpredictable transactional revenues, and regulatory changes pose risks to revenue stability and net margins despite growth strategies.

Catalysts

Provides data analytics and technology solutions to the insurance markets in the United States and internationally.

• Strong subscription growth of 8.3% suggests Verisk is effectively converting transaction-based contracts to subscriptions, improving growth consistency and potentially impacting future revenue positively.
  
• Cost discipline and operating efficiency have led to healthy organic constant currency adjusted EBITDA growth and strong margin expansion, indicating an impact on net margins.
  
• Investment in innovation and technologies catering to client needs for speed, efficiency, and accuracy points towards potential for future revenue growth through enhanced product offerings.
  
• Engagement with clients at strategic levels, specifically around integrating data sets across enterprises, suggests potential for expanded enterprise-wide opportunities, likely impacting future revenue growth.
  
• The launch of ISO Experience Index and continued investment in Core Lines Reimagine initiative highlight Verisk's focus on innovation and value addition to clients, which can drive better price realization and impact future earnings positively.

Assumptions

• Analysts are assuming Verisk Analytics's revenue will grow by 8.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 32.3% today to 33.5% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $8.56) by about August 2027, up from $897.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.2 billion in earnings, and the most bearish expecting $1.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.1x on those 2027 earnings, down from 41.4x today. This future PE is greater than the current PE for the US Professional Services industry at 26.1x.
• Analysts expect the number of shares outstanding to decline by 1.8% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.26%, as per the Simply Wall St company report.

Risks

• The dependence on insurance industry cycles and potential deceleration in auto insurance shopping could adversely affect revenue growth, particularly in underwriting and claims segments.
  
• The difficulty in predicting and the inherent variability of transactional revenue, especially related to weather-related claims activity, may impact overall revenue stability and predictability, affecting net margins.
  
• Transitioning contracts from transaction-based to subscription models, though potentially positive in the long term, creates short-term revenue recognition volatility and may impact immediate earnings growth.
  
• Strategic investments and accelerated hiring intended to support future growth might lead to increased operational costs in the short term before realizing expected revenue increases, potentially affecting net margins.
  
• Changes in regulatory environment or insurance industry’s adjustment to new norms, particularly regarding data privacy and climate risk, could impose additional costs or restrict operations, impacting earnings.

Valuation

• The analysts have a consensus price target of $270.43 for Verisk Analytics 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 $298.0, and the most bearish reporting a price target of just $225.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $3.5 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 37.1x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $260.94, the analyst's price target of $270.43 is 3.5% 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.