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MSCI: Index Manager Is Flying High (NYSE:MSCI)

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Index provider and manager MSCI Inc. (MSCI) is thriving in the current market environment in terms of both increasing subscriptions and its stock price – which is up ~60% over the past 12 months. While the company’s growth rate is solid, the rich valuation should give investors pause. That said, MSCI is more than an index manager: it has a substantial and growing recurring subscription model that is somewhat akin to the SaaS based model that the market is currently so fond of. As a result, some of MSCI’s valuation is based on a rational long-term perspective that is based on the strength (and endurance) of its brand and its subscription based revenue growth.

Most investors are aware of at least a few MSCI indexes – primarily the popular market-cap indexes. But they may be surprised at the total breadth of MSCI’s offerings that span across multiple categories:

  • Market Cap Indexes (Consumer Staples, Energy, Healthcare, IT, etc.)
  • Factor and Multi-Factor Indexes
  • Strategy Indexes
  • Thematic Indexes
  • Custom Indexes
  • ESG Indexes
  • Real Estate Indexes
  • Fixed Income Indexes

MSCI has benefited from the shift from active investing to low-cost, transparent, and typically more tax-efficient passive investing in major market indexes. The popularity of indexes such as the Invesco QQQ ETF (QQQ), BlackRock’s iShares ETFs, and sector based ETFs like the Consumer Staples Select Sector SPDR ETF (XLP) are examples of ETFs that have been warmly embraced by investors. Meantime, educated investors – who may have been burned by their individual stock picks – have learned about the benefits of investing in low-cost funds over time:

Source: dqydj.com

The strength of the MSCI brand across the global investment horizon is what makes the company’s research and analytics valuable to wealth managers, institutional clients, and asset managers and asset owners. After all, money managers are most likely to work with an asset manager that actually manages the market index that directly aligns with their funds’ stated objective. This is why MSCI’s subscription service – and recurring revenue model – is so strong and resilient whether the market is up or down. And that business is growing – as are operating margins.

Earnings

That is evident in the latest EPS report despite the fact that revenue grew 8.6% in 2019 but decelerated somewhat in Q2FY20 (6.2%):

Source: Q2 EPS Report

As can be seen in the above graphic, operating income, operating margin, and adjusted EBITDA all posted impressive growth yoy. That’s primarily due to the increase in recurring subscription revenues (+7.2%), non-recurring revenue growth (+34.4%), high retention rates, and – critically – new recurring subscription sales growth of (+15.5%).

That’s critical because new recurring subscription rates figure into the reported Q2 “total run rate”, which is MSCI’s current projection of fee revenue over the coming 12 months from subscriptions and product licensing revenue. The total run rate, as of end of Q2, was $1.65 billion – up 8.5% yoy. The increase was fueled primarily by a $112.7 million increase in recurring revenue from subscriptions.

Shareholder Returns

In Q2, MSCI boosted the quarterly dividend with a 14.7% increase to $0.78/share. The company’s target is for a payout in the range of 40%-50% of adjusted EPS. In Q2, $88.0 million was returned to shareholders through a combination of share repurchases and dividends (diluted shares outstanding declined 1.2% yoy).

Valuation

Wall Street’s embrace of recurring revenue models (like the software-as-a-service, or SaaS, models) has driven many companies to what I consider to be extreme valuation levels. See my Seeking Alpha articles on companies like Adobe Systems (ADBE) and Ansys (NASDAQ:ANSS) as examples (here and here). That being the case, it is no surprise that MSCI has caught the attention of Wall Street and also been bid up to what I consider to be a very high valuation relative to its demonstrated revenue and earnings growth:

Risks

The primary risk in my opinion is the current market valuation – based simply on price-to-earnings ratio – of a company whose revenue growth does appear to support a forward P/E of 50x.

There is institutional client risk as well. Back in 2012, Vanguard switched 22 of its funds away from MSCI indexes in order to cut the cost for investors. News of the switch caused MSCI’s stock to drop some 30%.

Note that MSCI’s latest 10-Q filing reported that BlackRock accounted for 10.9% of the company’s consolidated revenue over the first 6 months of 2020. If BlackRock were to take a page from Vanguard’s book, that would likely have a large and material impact on the stock price.

Summary & Conclusion

I like MSCI’s brand and business model. And I am impressed with the growth in its recurring revenue base and its total run-rate metrics. The future looks bright. That said, the valuation seems very rich despite the very positive subscription service potential. Even if a client like BlackRock didn’t pull a move like Vanguard did in 2012, BlackRock appears to be in a position of strength to negotiate more favorable terms, which would negatively affect MSCI’s margins. So, even while I admire MSCI’s business model and am bullish on the company’s future, the company is currently overvalued in my opinion. To be fair, Oppenheimer has a different opinion and considers the company an “outperform” with a one-year price target of $416. That equates to a one-year return of ~14%. That is not worth the downside risk in my opinion.

Disclosure: I am/we are long QQQ XLP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am an engineer, not a CFA. The information and data presented in this article were obtained from company documents and/or sources believed to be reliable, but have not been independently verified. Therefore, the author cannot guarantee their accuracy. Please do your own research and contact a qualified investment advisor. I am not responsible for the investment decisions you make.





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Northrop Grumman Earnings, Revenue Beat in Q3 By Investing.com

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© Reuters. Northrop Grumman Earnings, Revenue Beat in Q3

Investing.com – Northrop Grumman (NYSE:) reported on Thursday third quarter that beat analysts’ forecasts and revenue that topped expectations.

Northrop Grumman announced earnings per share of $5.89 on revenue of $9.08B. Analysts polled by Investing.com anticipated EPS of $5.62 on revenue of $8.87B.

Northrop Grumman shares are down 10% from the beginning of the year, still down 19.90% from its 52 week high of $385.00 set on January 30. They are under-performing the which is up 6.34% from the start of the year.

Northrop Grumman follows other major Technology sector earnings this month

Northrop Grumman’s report follows an earnings matched by Taiwan Semiconductor on October 14, who reported EPS of $0.92 on revenue of $12.4B, compared to forecasts EPS of $0.92 on revenue of $12.4B.

Danaher had beat expectations on Thursday with third quarter EPS of $1.72 on revenue of $5.88B, compared to forecast for EPS of $1.36 on revenue of $5.51B.

Stay up-to-date on all of the upcoming earnings reports by visiting Investing.com’s earnings calendar

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Buyers of Thai distressed assets plan big purchases as debt payment holiday ends By Reuters

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© Reuters. FILE PHOTO: Coronavirus disease (COVID-19) outbreak, in Bangkok

By Orathai Sriring and Satawasin Staporncharnchai

BANGKOK (Reuters) – A pandemic-exacerbated surge in Thai bad loans to nine-year highs and the end of a debt payment holiday are prompting buyers of distressed debt to embark on a shopping spree in Southeast Asia’s second-biggest economy.

About 6.89 trillion baht ($221 billion) of outstanding Thai debt – or 42% of total lending – has been under relief programmes that include payment deferment and reduction, interest rate reduction and restructuring.

The most significant of these – a government-mandated six month debt payment holiday – ended on Thursday.

The Bank of Thailand has said it does not expect sudden and large defaults, but its former chief Veerathai Santiprabhob, whose term ended last month, warned in August bad debt could jump as the economy slumped.

The country’s biggest distressed debt manager, Bangkok Commercial Asset Management (BK:), told Reuters it will spend 12 billion baht to acquire sour loans with a face value of about 40 billion baht this year.

“We will focus on buying debt this year and next,” Bunyong Visatemongkolchai, the bank’s executive board chairman said, adding it planned to issue 25 billion baht of bonds to fund purchases.

Its shares are up 11% this year, versus a 23% drop for the main stock index ().

Easy credit for consumers and businesses for years have prompted many warnings about the dangers of the household debt malaise in Thailand. Those are now proving prescient as the pandemic batters businesses, leaving as many as three million people without work.

Thai household debt is among Asia’s highest, at 83.8% of GDP as of June, the highest level since 2003, while the central bank predicts the trade and tourism-dependent economy could shrink by a record 7.8% this year.

Months of protests against the government and the monarchy could further slow a recovery for the economy.

For a graphic on Thailand’s economy and tourism:

https://fingfx.thomsonreuters.com/gfx/mkt/xlbvgjmjepq/Pasted%20image%201601392642559.png

Thailand’s non-performing loans amounted to 509 billion baht as of June, a nine-year high of 3.09% of total lending, versus 2.98% at the end of 2019. Loans with a significant increase in credit risk hit 7.48% of lending, up from 2.79% at the end of last year.

Banks prefer keeping distressed assets in house to avoid expensive write-downs, but sometimes see no option but to sell.

For a graphic on Bad loans at Thai banks:

https://fingfx.thomsonreuters.com/gfx/mkt/xlbpgjmlevq/Pasted%20image%201601390972890.png

“We will sell debt of businesses that have no potential,” said Atipat Asawachinda, first senior vice president of Kasikornbank (BK:), which plans to offload 10 billion baht of bad debt this year.

JMT Network Services (BK:), the biggest buyer of distressed consumer loans, will spend a record 6 billion baht buying debt this year, CEO Sutthirak Traichira-aporn said.

“The amount of debt being sold in the market is so great that we don’t have time to choose,” he said, noting it had acquired debt with a face value of 12 billion baht at an average 84% discount in the first half.

JMT’s shares have surged 66% this year.

Sutthirak said relief measures had only delayed the souring of loans, likening them to holding water behind a dam, “If there is too much, it will break out”.





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European Stocks Fall; German Sentiment Weakens as Virus Cases Mount By Investing.com

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© Reuters.

By Peter Nurse 

Investing.com – European stock markets sold off Thursday, as investors fretted about the lack of progress in the talks over a new U.S. stimulus package, fell and the region’s earnings season continued apace.

At 3:40 AM ET (0740 GMT), the in Germany traded 1.1% lower, the in France fell 1%, while the U.K.’s index dropped 0.7%.

Optimism surrounding the potential for a new coronavirus relief package dissipated late Wednesday after President Donald Trump accused Democrats of being unwilling to come to an acceptable compromise over the size of the package. 

Meanwhile, the second wave of European Covid-19 cases is weighing on German consumer confidence, according to market-research group GfK, its forward-looking fell to minus 3.1 points in November from a revised minus 1.7 points in October.

Around three-quarters of consumers currently assume that Covid-19 poses a major or very major threat, and about half are concerned or very concerned about their personal future, GfK said.

Europe has seen Covid-19 cases climb to a record high, with Spain becoming the first Western European country to exceed one million infections and Italy and Germany setting a record increase in daily cases. Despite that, data from the U.K.. another country with sharply rising infections, suggest that improved hospital treatments have significantly reduced mortality rates in the current wave.

In corporate news, IAG (LON:) stock slumped 5% after the airline group, which owns British Airways, reported a 1.3 billion euro loss in the third quarter, adding that it no longer expects to break even in cash flow terms in the fourth quarter as it cut its capacity outlook for the rest of the year.

Unilever (NYSE:) stock fell 0.4% despite the retailer’s third-quarter underlying sales rising thanks to growth in hand and home hygiene products.

It wasn’t all bad news though. Pernod Ricard (PA:) stock rose 1.3% after the French drinks maker said it expects a return to growth in the second half even as sales fell by 6% during the first quarter of fiscal 2021. Luxury goods group Hermes (PA:) also returned to sales growth in the third quarter in constant exchange rates.

Oil prices rebounded slightly Thursday, after suffering heavy losses during the previous session as official gasoline inventories add to worries about the outlook for fuel demand given the surge in Covid-19 cases.

The U.S. Energy Information Administration reported a of 1.895 million barrels in gasoline supply, against the 1.829 million-barrel draw predicted, suggesting U.S. motorists are increasingly choosing to stay home.

futures traded 0.1% higher at $40.06 a barrel, after dropping 4% Wednesday, while the international benchmark contract rose 0.3% to $41.86, after falling more than 3% the previous session.

Elsewhere, fell 0.4% to $1,922.65/oz, while traded flat at 1.1862.

 

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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