Markit Has 5% Upside; Goldman Concerned Over Its Performance Vs. Peers

Goldman Sachs has reinstated coverage of Markit Ltd INFO with a Neutral rating and $38 target price, implying a total return of 5 percent.

Recent Performance

"We are Neutral as we see weaker top line growth and less favorable end market exposure vs. peers offset by strong FCF generation and a runway for multiple years of "self-help" (cost synergies, stock buybacks)," analyst Andre Benjamin wrote in a note.

Shares rallied on July 13 and outperformed the S&P 500 by 9 percent on news of closure of its merger with IHS.

The analyst noted that the key drivers of the stock would be the company's execution on synergies, coupled with the evolving outlook for customers in energy, financials and Europe.

Related Link: IHS Markit To Support UN In Redesign Of UN/LOCODE System

Looking Ahead

That said, Benjamin expects below-peer organic revenue growth (4 percent three-year CAGR vs. 8 percent/11 percent median/average for coverage). The analyst noted that almost half of revenue is from selling to sell-side banks/asset managers and energy and about 30 percent is from EMEA (10 percent from the U.K.).

In addition, the analyst highlighted that the budget pressures of the company's energy and financials customers could hit its product sales.

"We expect EBITDA margin expansion to help boost organic EBITDA growth to 10 percent, in line with peers by 2018E and the buy-back of 4 percent to 5 percent of shares per year over 2017E–19E to drive above average 13–17 percent adjusted EPS growth," Benjamin noted.

However, the analyst gave the stock full credit for its target $125 million in cost synergies by 2019, but just under half credit for $100 million in target revenue synergies exiting 2019.

"We estimate every $20 million to $25 million in combined synergies drives about $1/share in value, all else equal," Benjamin added.

Shares of Markit closed Thursday's regular trading session at $36.20.

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