CLVT

Publicly traded companies mentioned herein: Clarivate PLC (CLVT), IHS Markit Ltd (INFO), Onex Corp (ONEX CN), S&P Global Inc (SPGI), Thomson Reuters Corp (TRI)

Highlights

The presenter is long shares of Clarivate PLC (CLVT), a high-quality provider of data services to several markets: academic and drug discovery on one side, and the patent market on other side. The core business spun out of Thomson Reuters (TRI) in 2017, but should be viewed as more of a turnaround situation at this point. 

The company is led by Jerre Stead, who formerly was executive chairman of IHS (INFO), which is now being acquired by S&P Global (SPGI). In a nutshell, the Clarivate thesis is based on strong execution in a collection of subscription services. These are focused largely on analytics, including scientific and academic research, patent intelligence and a variety of other related practices. Synergies should bring about acceleration of organic growth more in line with the peer group starting now (Q4).

Acceleration of organic growth will be driven by several factors: the restructuring of the salesforce with an emphasis on inside sales; taking pricing across the entire enterprise; and cross-selling opportunities. By and large, this is the playbook Jerry Stead used so successfully at IHS. He has committed to staying at the helm of this company for 2 - 3 more years. 

The info-services sector trades on organic growth. Clarivate is guiding for annual 6% - 8% organic growth long-term. Management says they will exit Q4 2021 at that 6% - 8% rate. At that level, the presenter expects to see the multiple re-rate back in line with peers.

Pro forma EPS in 2023 is roughly $1.25. The peers are trading at mid-20x EBITDA multiples and 30x - 40x EPS. Therefore, this could be a low-$40s stock by 2023.

The company expects to close its $5.4B acquisition of ProQuest by the end of the year. In connection with the transaction, Clarivate has secured a backstop consisting of a $4B fully committed bridge facility from Citi and Goldman Sachs. Clarivate intends to obtain long-term financing from debt and equity markets before the closing of the transaction.

Bloomberg consensus EPS is $0.74 for this year and $0.82 for next year, although the sell-side isn’t including any of the expected benefits from the ProQuest acquisition in those numbers, yet they are discounting for the incremental interest expense on the new debt and shares. The presenter sees $1.00 as a more realistic ’22 EPS estimate. As soon as the deal closes, he believes the sell-side will update their models to be more in line with his own. 

The presenter believes that this last quarter (Q3) was the final period for disappointing organic growth for the company at roughly 3%. Management has expressed confidence that the synergies kicking in will allow for a strong Q4. 

One caveat the presenter makes is that there are potentially a few large sellers involved in the stock right now: One is Onex Corp (ONEX CN), a legacy shareholder with roughly 40MM shares. Another is Leonard Green & Partners, which owned a company that Clarivate acquired. Leonard Green has roughly 100MM shares with a cost basis of perhaps $23 per share. Investors should therefore expect some secondaries. The presenter believes that any such price pressure can be countered with new interest in the stock as the company begins demonstrating acceleration in organic growth.

The company is hosting an investor day on Nov. 09, which should give investors more clarity and color on many of the points outlined above.