IHS May See Markit Merger Headwinds, But Baird Still Finds It Attractive

Baird analysts expect IHS Inc. IHS to face Markit Ltd MRKT merger headwinds. However, the brokerage finds the stock to be an attractive one. It has a Neutral rating and slashed the price objective to $122 from $132.

The brokerage believes results, as well as fine-tuned guidance included compensating positives and negatives. For instance, it named Transportation/Auto as performing exceptionally well. However, the company's resources, as well as Resources/energy bookings have yet to see the stability.

The analysts wrote in a note, "Organic subscription revenue trends are soft, but margin performance and guidance is excellent. We view risk/reward increasingly favorably in standalone IHS, but are looking to gain conviction in MRKT (not covered) ahead of close of "merger of equals."

The analysts added, "We find current risk/reward in pre-merger IHS intriguing, given combination of: - Valuation, trading at ~14.4x NTM adj. FCF/sh. (using our adj. EBITDA estimate and assuming ~65% FCF conversion), with what we view as slightly elevated but reasonable financial leverage (3.5x net debt/LTM EBITDA)."

The brokerage believes its IHS Energy business was challenged by certain "difficult end-market conditions." The analysts also think that bookings have yet to see stabilization. However, the brokerage said it view IHS Energy as a strong, wide moat business.