Morgan Stanley Capital International (NYSE: $MSCI) is an indexing company that provides asset owners to benchmarket their investment funds. They construct a broad range of equity indexes based on market cap, factors, or custom indexes. They also offer ESG & Climate indexes and provide analytics + business solutions. Many ETF providers could theoretically offer their own index but they'd prefer to use a strong brand such as MSCI. As a result, this creates an inherent stickiness for their product. As such, MSCI generates the majority (92%) through recurring revenue via subscription and asset based fees.
Financial Statement analysis of the past 5 years:
Income Statement:
Revenues have grown at a CAGR of 10.2% from 1,557M to 2,528M. This is both organic and inorganic growth (See Balance Sheet)
Operating Margin:
EBIT has expanded from 48.5% to 54.8%
Net margin/NI:
Net Income Margin has expanded from 36.2% to 45.4%. Net income has grown from 563M to 1,148M at a CAGR of 15.3%
Balance Sheet:
MSCI is heavily leveraged, with 457M in cash to 4,496M in long term debt. In addition, we can see that goodwill has expanded from 1,562M to 2,887M, demonstrating heavy M&A to increase revenues.
Debt Analysis:
Looking at MSCI's 10-K, we can see that MSCI took on significant debt during a low rates environment to funnel towards share repurchases.
Their debt terms are as follows:
4.00% due 2029 (1,000M), 3.625% due 2030 (900M), 3.875% due 2031 (due 1,000M), 3.625% due 2031 (due 600M), 3.250% due 2033 (due 700M) and rotating facility at the SOFR variable rate + 150-200 bp due in 2027 (due 339M). In summary, these debt terms are extremely favorable and excellent (other than the credit facility of course).
Shares Outstanding:
Shares outstanding have decreased from 84.81M to 79.09 at a -1.38% CAGR.
Free Cash Flow:
FCF has grown from 680M to 1,213M at a rate of 12.27%. Note that FCF is extremely close to NI, representing minimal CapEx, minimal D&A, and minimal SBC (essentially minimal non cash expenses).
To summarize, MSCI is an amazing business growing with consistent revenue, strong and expanding margins, and a healthy balance sheet. Their revenue model is recurring, requires little reinvestment, and is extremely profitable. While the debt could be concerning to some, the notes are due well in the future and are of no concern in the immediate future. Management has shown they're eager to reward shareholders by buying back shares consistently and using some money towards M&A. They have also laid out a long term vision where EBIT will slowly approach 50%+ margins while maintaining low teens revenue growth which is very exciting.
Valuation: Providing a DCF/Multiple/Dividend Discount valuation in my opinion is pointless. Everyone will have different opinions regarding their growth rates, margins, discount rates, etc. That being said, I will acknowledge that napkin math shows that MSCI should underperform the market as it trades at a premium towards their intrinsic value if you assume the business to grow at 10% for the next 5 years. I believe that it will outperform the market as it continues to increase their revenues and expand their margins.
