Usually upon comparing several country indices using exchange traded funds (ETFs), the term MSCI pops up.
MSCI (MSCI, Financial) offers products and services to support the needs of institutional investors.
Earnings performance
The financial services company reported its fourth-quarter and full-year 2016 results in early February. It reported 7% sales growth to $1.15 billion in 2016 and a 16.6% profit growth to $260.9 million – a 23% profit margin.
Both the 1.3% lower operational expenses and absence of the $6.39 million discontinued operations charge helped raise MSCI profits for the recent fiscal year.
Ă‚
“Our strong financial performance in 2016 reflects the leadership role we are playing as a preferred provider of mission”critical investment decision support tools to our clients.
“In 2016 we fired on all cylinders, delivering increases of 33% and 31% in diluted EPS and adjusted EPS, respectively, driven by a 7% increase in revenue, a 1% decline in costs, the repurchase of 10 million shares, and a 180 point reduction in our effective tax rate. To build on these results and drive our future growth, we are continuing to invest in our global equity products, fixed income, factors, ESG, exchange”traded derivatives linked to our indexes, new services, real estate and our new Analytics platform.
“We believe that the company has significant growth opportunities ahead, and we will look to build on the positive momentum we established over the past year to capitalize on these new growth opportunities for the benefit of our shareholders in 2017 and beyond.” – Henry A. Fernandez, chairman and CEO of MSCI
Guidance
For fiscal 2017, MSCI expects its net cash provided by operating activities and free cash flow, among other things, to be in the range of $360 million to $410 million and $310 million to $370 million.
This compares to figures of $434.7 million and $392 million in fiscal 2016, or a corresponding 11.4% and 13.3% decline in both cash flow lines when taken at midpoint figure of the guidance.
Valuation
MSCI trades at high premiums compared to its peers. According to GuruFocus data, MSCI had a trailing price-earnings (P/E) ratio of 35.5 times (industry median 20), price-book (P/B) ratio of 27.4 times (industry median 1.2) and price-sales (P/S) ratio of 8.1 times (industry median 3.6).
The company also had trailing 1.1% dividend yield and 29% payout ratio.
Total return
MSCI handily outperformed the broader Standard & Poor's 500 index in both the short and long term. According to Morningstar data, MSCI had one- and five-year total returns of 37.7% and 22.7% while the broader index had 22% and 14%.
MSCI
MSCI was founded in 1969. As mentioned earlier, MSCI offers products and services to institutional investors. In addition, MSCI provides products and services that support global investing.
According to company filings, MSCI clients include asset owners (pension funds, endowments, foundations, central banks, sovereign wealth funds, family offices and insurance companies), asset management companies (mutual funds, hedge funds, providers of exchange-traded funds [ETFs]), private wealth managers, real estate investment trusts and financial intermediaries (banks, broker-dealers, exchanges, custodians, trust companies and investment consultants).
MSCI’s clients use the company’s products and services to help construct portfolios and allocate assets. MSCI products could be used for benchmarking, index-linked product creation, portfolio construction, risk management, ESG integration, performance attribution and regulatory reporting.
MSCI’s principal business model is to license annual, recurring subscriptions to the company’s products and services for a fee, which in a majority of cases is paid in advance. Also, MSCI charges its clients to use MSCI indexes as the basis for index-linked investment products such as ETFs or as the basis for passively managed funds and separate accounts.
MSCI produces benchmark reports and other publications associated with the company’s Real Estate products. The company also realizes one-time fees related to customized reports and consulting services among other services.
MSCI operates in four segments: Index, Analytics, ESG and Real Estate.
(10-K, MSCI)
Index
MSCI’s index operating segment is primarily a provider of equity indexes. The indexes are used in many areas of the investment process including index-linked product creation and performance benchmarking as well as portfolio construction and rebalancing and asset allocation.
Index sales grew 9.8% to $613.6 million in 2016 compared to the year before and generated 53% – the most of all segments – in total MSCI sales. The segment also delivered an adjusted EBITDA* margin of 70% – again, highest – similar to 2015 margin.
*MSCI 10-K: “Adjusted EBITDA,” a measure used by management to assess operating performance, is defined as net income before income (loss) from discontinued operations, net of income taxes, plus provision for income taxes, other expense (income), net, depreciation and amortization of property, equipment and leasehold improvements, amortization of intangible assets and, at times, certain other transactions or adjustments.
(10-K, MSCI)
Analytics
MSCI’s Analytics operating segment uses analytical content to create products and services that offer institutional investors an integrated view of risk and return.
MSCI’s analytics’ research-enhanced products and services help institutional investors understand and control for market, credit, liquidity and counterparty risk across all major asset classes, spanning short-, medium- and long-term time horizons (1).
In 2016, MSCI’s analytics sales grew by 3.4% and generated 39% or $448.4 million of total MSCI sales. The segment also delivered an adjusted EBITDA margin of 29% compared to 22% last year.
(10-K, MSCI)
All Other
MSCI’s All Other segment consists of ESG and Real Estate.
ESG
MSCI’s ESG operating segment offers products and services that help institutional investors understand how environmental, social and governance (ESG) factors can impact the long-term risks of their investments (2).
Real Estate
MSCI’s Real Estate operating segment is a provider of real estate performance analysis for funds, investors, managers and lenders as well as occupiers through the disposition of the Real Estate occupiers business. Also, this segment provides products and offers services that include research, reporting and benchmarking
MSCI’s All Other sales grew by 7.4% to $88.8 million or 8% of total MSCI’s sales. The segment delivered an adjusted EBITDA of $9.5 million compared to a loss of $6.8 million in 2015.
(10-K, MSCI)
Run rate
Run rate is a key operating metric and is important because an increase or decrease in MSCI’s run rate ultimately impacts the company’s operating revenues.
At the end of any period, MSCI generally has subscription and investment product license agreements in place for a large portion of total revenues for the following 12 months. The company measures the fees related to these agreements and refer to this as “run rate.”
MSCI’s run rate grew 6.8% in 2016.
(10-K. MSCI)
Subscription sales
In 2016, net new recurring subscription sales grew by 2% to $65.6 million.
(10-K, MSCI)
Aggregate retention rate
The annual aggregate retention rate represents the retained subscription run rate (beginning subscription run rate less actual cancels during the year) as a percentage of the subscription run rate at the beginning of the fiscal year.
In 2016, MSCI’s index’s aggregate retention rate improved by 1 basis point to 95.3%. MSCI’s analytics’ retention rate, meanwhile, declined to 91% from 93% in 2015. MSCI’s All Other segment's retention rate improved to 90% from 88.6%.
In total, MSCI’s total aggregate retention rate declined to 92.7% from 93.4%.
Overall, MSCI’s sales and profit growth and margin averages 8%, 7.6% and 24% in the past three fiscal years.
Cash, debt and book value
As of December, MSCI had $792 million in cash and cash equivalents and $2.1 billion in debt with a debt-equity ratio of 6.53 times –Â compared to 1.75 times in 2015. MSCI also had 61.8% of $3.08 billion assets in goodwill and intangibles, according to Morningstar data.
MSCI also carried a book value of $318 million compared to $901 million in 2015.
Cash flow
(10-K, MSCI)
In 2016, MSCI grew its cash flow from operations by 42.1% to $434.7 million. In addition to its improved profits, MSCI recorded increase in cash flow from stock-based expenses, depreciation and amortization improvements, other noncash adjustments, prepaid income taxes, accrued compensation and related benefits, accrued liabilities and also a 171% increase in deferred revenue to $21.8 million.
The company allocated $42.6 million in capital expenditures, including software and development costs, leaving it with $392 million in free cash flow –Â compared to $256.8 million in 2015.
(10-K, MSCI)
In 2016, MSCI allocated 200% of its free cash flow in dividends and share repurchases. On average in the past three years, the company allocated 214% of its free cash flow in shareholder payouts – dividends and share repurchases.
MSCI also took in $492.8 million in borrowings net issuance cost.
Conclusion
MSCI demonstrated steady solid growth in all of its segments; its all other segment has been able to profit after two years of losses. MSCI key metrics, as discussed above, exhibited impressive stability except for a retention decline in its analytics business.
Meanwhile, MSCI exhibited a bit of a huge leap with an outstanding leveraged balance sheet and has been generous to its shareholders given its free cash payout ratio.
(MSCI Price and P/E Ratio, GuruFocus)
In November, Credit Suisse resumed its coverage on MSCI and rated it as an outperform. Meanwhile, six analysts had a median target price of $93.5 per share, according to Financial Times.
Asking a 20% margin and applying a three-year profit and earnings multiple would provide a value of $73 per share.
In summary, MSCI is a hold with $83 per share value.
Notes
- 10-K: According to filings, MSCI’s analytics global risk and performance platform is built for scale, enabling clients to conduct complex calculations and stress tests. Analytics offers products and services that assist institutional investors with portfolio construction, risk management, performance attribution and regulatory reporting.
- 10-K: The ESG operating segment’s data and ratings products are used in the construction of equity and fixed income indexes to help institutional investors benchmark ESG investment performance, issue index-based investment products, as well as manage, measure and report on ESG mandates.
Disclosure: I do not have shares in any of the companies mentioned.
Start a free seven-day trial of Premium Membership to GuruFocus.
