MSCI Delights Investors With Strong Q3 Results And $1.5 Billion Share Repurchase – Buyback Wednesdays

MSCI delivered strong results in its latest Q3 2024 report, surpassing both top and bottom-line estimates. The company also approved a $1.5 billion share repurchase plan, roughly 3% of its market cap at the time of announcement. After taking a deeper dive into MSCI, I found the company fascinating and decided to share my insights. Things that really stood out include its impressive revenue and profitability growth, a strategic approach to capital allocation, and a seasoned management team, with the CEO at the helm for over 20 years!

Founded in 1986 when Morgan Stanley acquired licensing rights to Capital International data, MSCI initially operated as a Morgan Stanley business unit before its spinoff in 2007. Today, MSCI is an investment research firm offering stock indexes, portfolio risk and performance analytics, and governance tools tailored to institutional investors and hedge funds. Headquartered in New York, it serves 7,000 clients in nearly 100 countries. 

MSCI (Morgan Stanley Capital International) Inc. (MSCI): $588.32

Market Cap: $46.11B

EV: $50.21B

Key Insights

• MSCI has $15.6 trillion in assets benchmarked to its indexes.
• The company has exhibited consistent revenue and profitability growth over the last decade.
• It is a highly profitable business with 97% recurring revenue and strong gross/net margins.
• Significant dividend growth and share buybacks make it an attractive investment for long-term investors.
• The company has a stable executive team with long-serving members.
• Management has raised free cash flow guidance for 2024.
• Valuation is high likely due to long-term growth potential and the very high margins the company enjoys.
• In the short term, the business faces a challenging environment with increased cancellations and longer sales cycles. 

MSCI is active in 4 main segments:

• Index (57% of sales): Provides indexes for ETFs, mutual funds, and other products, earning fees based on AUM linked to indexes. MSCI benefits from the rising popularity of passive investing.
• Analytics (24% of sales): Offers risk management, performance attribution, and portfolio tools.
• ESG & Climate (11% of sales): Supplies ESG and climate data to help institutional investors assess sustainability impacts.
• Private Assets (8% of sales): Provides data and analytics for private asset markets.

Employee count grew 22% to 6,118 as of September 30, 2024, mainly due to acquisitions, highlighting growth and profitability. Recently, Morgan Stanley raised MSCI’s price target by $22 to $662.

Who Are Its Clients?

Traditionally, MSCI’s client base has been dominated by asset managers, hedge funds, asset owners, and banks.  Recently, the company has expanded its focus to include new client segments such as insurance companies, wealth managers, general partners, corporates, and corporate advisers. Today, MSCI serves around 7,000 clients.

Business Model

Source: MSCI (Investor Presentation)

For the nine months ending September 30, 2024, MSCI’s largest client by revenue, BlackRock, contributed 10.1% of its total operating revenues. Of this, 96.1% came from fees tied to assets in BlackRock’s ETF and non-ETF products that track MSCI indexes.

Management

MSCI’s leadership team includes long-tenured members. Chairman and CEO Henry Fernandez has led the company for nearly 30 years and holds a $1 billion stake (2.7%). Previously, he served as Managing Director at Morgan Stanley. President Mr. Pettit, with over 20 years at MSCI, took on the role of Chief Operating Officer in 2020, following a stint at Bloomberg from 1992 to 1999. CFO Mr. Wiechmann, with MSCI since 2012 and CFO since 2020, was formerly an investment banker at Morgan Stanley, where he played a key role in MSCI’s IPO and acquisitions.

Both the CEO and CFO were prompt in grabbing company shares when the stock price dropped significantly.

Source: InsideArbitrage

Acquisitions

MSCI has expanded through recent acquisitions, including private assets data provider Burgiss Group for $697 million in August 2023, carbon markets intelligence provider Trove Research for $37.5 million in November, wealth tech platform Fabric RQ for $8 million in January 2024, and index technology platform Foxberry Ltd. for $23.5 million plus contingent payments in April. These acquisitions have increased MSCI’s debt, raising some leverage concerns.

Debt

As of September 30, 2024, MSCI has a net debt of $4.2 billion, which has been rising steadily each quarter. Recently, the company repaid $125 million of the outstanding balance on its Revolving Credit Facility. However, with no debt maturing until 2029, MSCI has flexibility to allocate capital toward growth initiatives in the near term.

Source: MSCI (Investor Presentation)

Share Repurchase

MSCI has a history of timely share buybacks. Management has effectively managed capital allocation by repurchasing their stock when it is attractively valued. Recently, the Board approved a new $1.5 billion buyback program, replacing the prior $1 billion authorization and raising the total to $1.9 billion. Over the past three years, MSCI has reduced its share count by 5%, with $440 million (879,000 shares) repurchased year-to-date at an average price of $501 per share.

Dividend

MSCI is more inclined towards dividends than share repurchases. It has an impressive dividend growth record, increasing from $0.80 in 2015 to $6.40 in 2024—a 700% rise, appealing to dividend growth investors. MSCI has a 5-year dividend CAGR of 27% and a low yield of 1.12%. Its payout ratio is 42%, providing substantial room for future increases.

Source: SeekingAlpha

Emerging Opportunities for MSCI

According to PwC analysis, Global ETF assets under management achieved a remarkable CAGR of 18.9% in the past five years, and have grown by more than 25% from December 2022 to reach a new record of almost $11.5 trillion at the end of 2023. The ETF markets are projected to show similar growth in the future. MSCI has been benefitting from this growth and will continue to benefit from it.

Showing his optimism about their ESG and Climate segments the company’s CEO commented,

“We are in a cyclical drought, in a cyclical downturn here, given the reset of regulation in Europe, given some of the political events in the U.S. But we are a company that focuses on the long-term and invest for the long-term. And I think that climate is gradually going to recover, probably sooner rather than later. And ESG will may take a little more time, but it will recover and it will return to higher growth rates.  We are a long-term compounder of earnings growth and revenue growth, and we believe that these two areas of ESG and climate will provide a meaningful uplift in our revenues over time.”

Source: MSCI (Investor Presentation)

Valuation

MSCI has a forward P/E of 35.51 and a forward EV/EBITDA of 28.97. Given its historical valuations, market leadership, growth potential, and a strong business model with high retention and recurring revenues, the current valuation starts to make sense.

Financials

Source: InsideArbitrage

Over the past decade, MSCI has seen steady growth in revenue, net income, and improved margins, with an impressive gross margin of 82.2% and net profit margin of 44.6%. Its capital-light model, with low capital expenditures (CAPEX-to-sales ratio of 0.009 and CAPEX-to-operating cash flow ratio of 0.016), enables strong free cash flow generation, supporting both share buybacks and dividends. MSCI’s free cash flow has grown from $302 million to $1.145 billion, achieving a 10-year FCF per share CAGR of 20.5%.

Peers

MSCI’s primary competitors are S&P Global (SPGI), Bloomberg, Moody’s Corporation (MCO), Morningstar (MORN), and Nasdaq (NDAQ). While MSCI has lagged behind these peers over the past one and three years, it has outperformed them over five years. MSCI leads in revenue and dividend growth, with the highest gross and net margins among its competitors, though it trades at a slightly higher valuation.

Source: SeekingAlpha

Q3 Results

MSCI reported a strong third quarter with both top and bottom lines beating estimates. 

• Revenue grew 16% with growth across all segments. Index revenue grew 11.8% y/y, analytics revenue grew 11.7%, ESG & Climate revenue grew 11%, and private assets’ revenue grew 1%.
• Asset managers continue to be the largest contributor to its subscription run rate, adding over $60 million organically in the past year. Retention among asset managers remains strong, nearing 96% in Q3.

Management has raised its full-year guidance for net cash from operations and free cash flow.

Source: MSCI (Investor Presentation)

Risks

• MSCI faces foreign currency exchange risk, with 16.6% of its revenue impacted as of September 30, 2024.
• Relies on third-party providers for data, applications, services, and certain vendors for product distribution.
• Global operations increase management complexity and exposure to additional risks.
• Cancellations or reductions from major clients could significantly affect business due to client concentration.
• Faces risks of data leaks and cybersecurity threats.
• Competitive and financial pressures in the industry may lead to price cuts or loss of market share.

Bottom Line

MSCI is a growth company with a large market opportunity and solid long-term potential. The capital-light model further supports expansion in financial services and ESG analytics. The big question is given the amazing recent market performance (at least for U.S. large cap stocks), is the next decade going to be as favorable for MSCI as the last decade was.

Welcome to edition 95 of Buyback Wednesdays, a monthly series that tracks the top stock buyback announcements during the prior month. The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

There was a further decline in the number of companies announcing buybacks, down from 70 last month to 60 this month.

Top 5 Stock Buyback Announcements 

1. TKO Group Holdings Inc. (TKO): $118.89

On October 24, 2024, the Board of Directors of this sports and entertainment company announced that it had approved a new $2 billion share repurchase program, equal to around 21.5% of its market cap at announcement.

2. Etsy, Inc. (ETSY): $52.73

On October 30, 2024, the Board of Directors of this online marketplace announced that it had approved a new $1 billion stock repurchase agreement. This represents around 18% of its market cap at announcement.

3. Resources Connection, Inc. (RGP): $8.13

On October 17, 2024, the Board of Directors of this consulting service provider announced that it had approved a new $50 million share repurchase program, equal to around 17.5% of its market cap at announcement.

4. Ulta Beauty, Inc. (ULTA): $382.91

On October 16, 2024, the Board of Directors of this beauty products retailer approved a new $3 billion share repurchase program , equal to around 17% of its market cap at announcement. 

5. ConocoPhillips (COP): $109.21

 On October 31, 2024, the Board of Directors of this energy company authorised an additional $20 billion share repurchase program, equal to around 16% of its market cap at announcement. 

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