Why You May Need To Pay Attention To The Noise Around Verisk Analytics, Inc. (VRSK)
- Verisk summarizes its strengths under Verisk Way, and they are exciting.
- Wall Street calls for EPS of $0.65 on revenue of $493 million for the current quarter (second quarter 2015).
- Acquisition of Wood Mac likely to accelerate Verisk’s expansion abroad
You may already know that Verisk Analytics, Inc. (NASDAQ:VRSK) is a provider of information about risk, and it serves both the private and public sectors. The company’s industries include healthcare, finance services and more. What you may not already know is the quality of Verisk as an investment option.
To better bring out the real Verisk and enable you to make more informed investment decisions, this article takes a closer look at the company’s strengths/opportunities and weaknesses/threats.
The Verisk Way: a look at competitive advantages
To begin with, the management of Verisk has already identified four areas that it considers to be competitive advantages. Under what is internally famously called Verisk Way, the management cites first-mover, unique data assets, deep expertise and close ties with customers are the four core competitive advantages.
Healthcare and insurance are some of Verisk’s most important businesses, both in terms of their revenue contribution and growth potential.
Verisk’s Second Quarter estimates
Verisk reports its 2nd quarter later this month and while the management hasn’t put forward estimates for the quarter, Wall Street has some predictions. The consensus estimate calls for EPS of $0.65 on revenue of $493 million. The company posted revenue of $459.4 million in the latest quarter, beating estimates.
Given that Verisk’s second quarter results are around the corner, this analysis takes a broader medium and long-term view of the company.
Healthcare business in focus
Verisk’s Medicare Advantage division within the healthcare segment serves four of the five top U.S. healthcare plans. Given that UnitedHealth Group Inc. (NYSE:UNH) is among the top five plans, it is safe to conclude that Verisk doesn’t work with UnitedHealth, because the companies are competitors at some level.
Verisk’s healthcare business is predominately focused on the payer market. As such, merger deals in the healthcare payer space would likely have an impact on the company’s healthcare business.
Already, there are a number of potential merger rumors. For example, it is speculated that UnitedHealth is interested in buying out Aetna Inc (NYSE:AET). At the same time, both Aetna and CIGNA Corporation (NYSE:CI) are said to be interested in acquiring Humana Inc (NYSE:HUM), which has already tapped investment bankers to support its next move.
Anthem also disclosed its desire to gobble Cigna, but things aren’t smooth on that front as Cigna has already rejected Anthem’s overture.
Possible impacts of the deals:
So, what really is there for Verisk in case any of these rumored deals go through?
- If Aetna combines with Humana, it would be a huge plus for Verisk. However, if another company other than Aetna consumes Humana, the result may have little to no impact on Verisk’s healthcare business.
- If UnitedHealth mergers with Aetna, the deal would be a negative for Verisk. The reason UnitedHealth’s takeover of Aetna would be bad news for Verisk is that UnitedHealth’s unit, called Optum, competes with Verisk in the payer market.
Aetna/ Humana merger:
The planned combination of Aetna and Humana will likely create modest growth opportunity for Verisk in its healthcare business. Verisk could use its already strong relationship with Aetna to capture more risk-adjustment jobs from Humana, which for the most part keeps risk-adjustment functions in-house.
In other words, while Verisk already has large exposure to Aetna, its exposure to Humana remains small, thus the large potential if the combination of the two companies could shift more risk-adjustment work, especially on the side of Humana, to an outside provider like Verisk.
The potential from Aetna/Humanaunity:
Both Aetna and Humana have sizeable businesses in the Medicare Advantage space. At the end of the first quarter, Aetna’s coverage was 1.2 million lives under Medicare Advantage. That compared to Humana’s 3.2 million lives in its Medicare Advantage. As such, the potential in Humana is far larger than in Aetna, and as already highlighted, Verisk could use its relationship with Aetna to win more risk-adjustment solutions business from Humana.
At this juncture, it is difficult to accurately predict the possible financial impact the deal between Aetna and Humana could have on Verisk’s revenue. That is because there are risks to the deal as well. As already highlighted, Humana currently keeps most of its risk-adjustment works in-house. If it chooses to bring more of those works in-house, the result would be unfavorable for Verisk. However, the possibility of Humana doing more risk-adjustment functions internally looks remote, given the increased regulatory scrutiny in the risk-adjustment space.
For that reason, the odds that Humana would offshore more of its risk-adjustment functions are high, and Verisk looks poised to benefit from such a move.
Acquisition of Wood Mackenzie
Verisk is continuing with the integration of global analytics provider Wood Mackenzie (Wood Mac), which it acquired early this year for $2.8 billion.
Wood Mac competes with IHS, and boasts global energy clients with operations in over 80 countries. Verisk agreed to retain Wood Mac’s CEO, Stephen Halliday, to run the new business, which is very important for continuity.
The acquisition of Wood Mac is a positive for Verisk. The data assets, the source of the data assets, industry position, relatively small revenue base and growth potential are some of the factors that make Wood Mackenzie an attractive buyout.
The acquisition of Wood Mac is expected to be accretive to revenue and profits over the long-term.
Benefits to Wood Mac:
Wood Mac will benefit from Verisk’s large capital and financial base. Verisk finished the first quarter with $152.9 million of cash, up from $39.4 million in the previous quarter.
Access to more funds will enable Wood Mac to accelerate its acquisition for more growth than it could do previously. Additionally, access to a larger pool of funds will enable Wood Mac to sharpen its innovative edge, leading to more customer wins and revenue gains.
Wood Mac would also leverage various Verisk capabilities to bolster its revenue wins, increasing overall revenue.
Benefit to Verisk:
On the revenue front, Verisk would benefit from selling its solutions to the clients of Wood Mac.
Over the long-term, Verisk could tap into Wood Mac’s large global presence to speed up the expansion of its insurance business abroad. Taking its insurance business global would be a huge plus for Verisk, given that the company’s insurance business is mostly concentrated in the U.S.
Verisk Analytics, Inc. (NASDAQ:VRSK)’s Insurance business is rated among the world’s best. However, this business is largely underestimated by investors and it is only fair to shed more light on Verisk Insurance.
To begin with, Verisk Insurance has huge organic growth potential. Clients that use Verisk Insurance appreciate the high ROI they are able to generate by leveraging Verisk’s solutions. Add this to the fact that Verisk Insurance offers mission-critical solutions and you see why the business is more valuable than already thought. The high level of customer stickiness to Verisk Insurance is a huge competitive advantage.
Still, as Verisk funnels more resources to innovation, there is the possibility of coming up with new products or enhancing existing solutions for incremental revenue wins in the insurance market.
Areas of potential risks
Significant exposure to U.S. insurance industry:
The company generates nearly 60% of its revenue from the Insurance business, whose backbone is the U.S. insurance market. As such, disturbances in the U.S. insurance industry that lead to lower premium volumes or increased claims may hurt Verisk’s insurance revenue.
Large exposure to outside partners:
The company relies heavily on the data that it obtains from third-party providers and other industry participants. Any development that leads to the data suppliers stopping work with Verisk could have material adverse impact on the company’s operations and revenue.
Implications of data breach:
Verisk handles a lot of private data. In the event that the company is hit by a data breach that significantly compromises private data, the result could be unbearable. For one, the company could see some of its clients and data providers walk away, hurting its processes.
The huge data threat also means that the company has to invest a lot of money on data protection, possibly increasing its costs and hurting profit gains.
After a look at Verisk Analytics, Inc. (NASDAQ:VRSK)’s strengths and opportunities, alongside weaknesses or threats, you can see clearly where the business stands. What comes out more clearly is that, while threats exist for Verisk, the company looks stable by most measures and there is also more room to sprint going forward.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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