|Company||MSCI (NYSE: MSCI )|
|Operations||Provides index data and equity risk management solutions to professional investors.|
|Recent price (Jan. 26, 2011)||$34.90|
|Market Cap||$4.1 billion|
|Trailing P/E Ratio||43.1|
|Return on Equity, Last Twelve Months||12%*|
Sources: Capital IQ, a division of Standard & Poor's and Yahoo! Finance.*To Nov. 30, 2010.
Since I profiled MSCI as one of the 10 Core Stocks for Your Portfolio on Sept. 15, the stock has trailed the market substantially with a 2.3% return against a whopping 15.2% increase for the S&P 500 (price return through Wednesday, Jan. 26). However, investors should be careful not to read too much into this gap with regard to MSCI's prospects; in my opinion, it is the broad market's increase that looks somewhat anomalous. Instead, let's focus on the business; MSCI has since released earnings for its fiscal fourth quarter ended Nov. 30. What can we glean from the report?
One of MSCI's strengths is a high level of recurring revenues coupled with high retention rates. During the fourth quarter, the aggregate retention rate increased to 85% from 82%, for a full-year retention rate of 87% (vs. 84% in fiscal 2009). With regard to its ETF licensing activity, the threat of the "death of equities" has indeed proved to be much exaggerated; individual investors are returning to stocks on the back of strong performance. MSCI management indicated that its pricing power in this area is undiminished.
The company's subscription run rate -- which excludes asset-based fees -- increased 10% in the fourth quarter; the firm's largest businesses (including index and risk management analytics) were the largest contributors to that growth. In the medium term, investors should keep an eye out for progress in the restructuring of the company's Governance segment, a product of MSCI's acquisition of RiskMetrics.
No buying decision deserves to be made without a hard look at price. In mid-September, I advised investors not to rush into the shares, which I found a bit expensive for my taste. At the time, they were trading at 21.6 times forward earnings; today, that multiple is little changed at 21.0. Yes, MSCI's business is performing well and the environment in which it operates has improved, but the current price contains little margin of safety.
On a relative basis, MSCI's valuation is in line with those of its three closest publicly traded peers: Thomson Reuters, Verisk Analytics (Nasdaq: VRSK ) and FactSet Research Systems (NYSE: FDS ) . To be sure, I think MSCI is the class of the field, so one could argue that it deserves a premium to its peer group. Fair enough, but that doesn't exclude the possibility that the peer group is itself somewhat overvalued -- which I think is likely to be the case.
The bottom line
Buying MSCI shares now isn't a dreadful idea, but neither is it really compelling. I'm sticking to my previous advice: If you wish to buy shares today, I continue to recommend opening a "tasting" position that you can fill out during a correction.