Will IHS Offset Energy Sector Slump With Markit Merger?

IHS agreed to merge with London-based financial information services provider Markit on March 21. The merged entity will be called IHS Markit; the merger is being described as a "merger of equals," with an implied equity value of $13 billion.

IHS received regulatory approval and is just awaiting a shareholder vote to close the deal, currently scheduled for July.

The company reported second quarter results, with another quarter of strong margin expansion and revenue growth of 6 percent. However, reported organic revenue fell 1 percent, hurt by the flagging energy sector.

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"We think the merger will help IHS to diversify revenue and make financial services a focus of future growth," analyst Joseph Bonner wrote in a note.

Energy sector customers currently account for about 33 percent of IHS revenue, and with the Markit merger, that share should decline to 27 percent or 28 percent.

Bonner noted that the Markit merger would catapult IHS into the financial industry vertical, where it currently has little presence, apart from providing IHS a greater scale in the very fragmented information services industry. IHS sees $125 million in eventual annualized cost synergies.

Meanwhile, the company said, "[T]he uncertainty caused by the Brexit vote will not negatively impact the company and could, in fact, benefit it. Management also sees margin expansion as sustainable at legacy IHS."

However, Bonner cut his FY16 EPS estimate to $6.27 from $6.30 while maintaining FY17 EPS forecast of $6.71.

Bonner maintains his Hold rating on the stock, which is currently up 3.36 percent to $114.66 on the day.