Black Knight IncBKI69,29 $
Today we have a moderately speculative idea.: take shares in Black Knight IT company (NYSE: BKI), to make money on a quick purchase of a company.
Growth potential and validity: 22,5% behind 20 Months; 10% per annum during 10 years.
Why stocks can go up: because the company is already being bought. But even without this, she has a good business..
How do we act: we take shares now by 69,34 $.
When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
Our reflections are based on the analysis of the company's business and the personal experience of our investors, but remember: not a fact, that the investment idea will work like this, as we expect. Everything, what we write, are forecasts and hypotheses, not a call to action. To rely on our reflections or not – it's up to you.
And what is there with the author's forecasts
Research, like this and this, talk about, that the accuracy of target price predictions is low. And that's ok: there are always too many surprises on the stock exchange and accurate forecasts are rarely realized. If the situation were reversed, then funds based on computer algorithms would show results better than people, but alas, they work worse.
So we're not trying to build complex models.. The profitability forecast in the article is the author's expectations. We specify this forecast for the landmark. As with the investment idea in general, readers decide for themselves, it is worth trusting the author and focusing on the forecast or not.
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Investment editorial office
What the company makes money on
BKI makes software for the analysis of mortgage transactions and their further maintenance.
Revenue of the company, according to its annual report, divided into the following segments.
Software Solutions — 85%. Segment revenue is divided into two parts. Loan servicing software takes 67% - this includes everything, what is connected with the automation of the work of the department of mortgage loans, payments on the loans themselves, related work of accounting. Revenue depends on the number of mortgage loans processed.
33% provides software for issuing loans - this includes everything, related to the processing of mortgage loans and their issuance. Same way, as in the previous part, revenue depends on the number of applications. Segment EBITDA margin - 57,1% from its proceeds.
Data and analytics — 15%. Services for corporate players, working in real estate, related to the provision of data on credit risks, consumer behavior modeling. Segment EBITDA margin - 35,6% from its proceeds.
The company operates only in the USA.
Arguments in favor of the company
Fell down. The company's shares have fallen significantly in the past six months.: with 83 to 69,34 $. The reason for this was a slight decrease in the margins of her business in the last two quarters.. I believe, that given its low price and some circumstances, we can hope for a rebound.
Buy. The company is bought by the operator of stock exchanges Intercontinental Exchange (ICE). BKI buy at price 85 $ per share - with premium 35% to the price. Details not yet known, but there is talk of, what 80% purchases will be paid in cash 69 $ per share, and investors will receive the rest in ICE shares. On this issue, investors, however, will vote, and the exact proportions will be known much later.
The deal should be closed somewhere in the second half 2023, so there is a good chance that, that until then there will be a new buyer, who will offer BKI a higher price.
BKI buy, evaluating the company as follows: P / E — 42 taking into account its operating profit without one-time non-core income and P / S — 8,73. This is quite a lot, but by the standards of IT, not to say that insanely many. Especially if you take into account the profitability of BKI - it makes sense for another potential buyer to offer the company a higher price..
This may provoke a trade for BKI, which will lead to the growth of quotes above the level of purchase already offered by ICE. It seems to me, ICE motivated to trade for BKI, as its core stock exchange business is now under threat.
The corporate sector is looking for opportunities to create alternative exchange platforms, and professionals from the world of investments are dissatisfied with the high cost of the company's services. Therefore, ICE is intensively developing the near-mortgage business. But if BKI is bought at the current price, then we will get a good profit.
“They feed us well here too”. Even if the company is not bought, she still looks good. P / E she has, subtracting its one-off non-core investment income, is 33, which is inexpensive by IT standards. Sector, where she works, extremely promising: the segment of real estate transactions is asking for digitalization. So even if BKI don't buy, then we will be left with shares of a very good company, which makes sense to hold longer.
What can get in the way
All problems, which we may encounter when investing in BKI, relevant only if, if they don't buy it. For example, regulators will block the deal. Let's figure it out, what problems might arise.
BKI shares will temporarily fall. Also if the deal falls apart due to the fault of BKI, let's say the shareholders will block it, then the company will have to pay a one-time penalty - more than $ 300 million.
Ricochet. In the event of turmoil in the mortgage market, the company's shares will suffer from a rebound: investor skepticism will extend to all issuers, without regard to the fundamental foundations of the business. At the same time, in the long run, as I see, BKI is not in danger, apart from the complete economic collapse of the United States. Digitizing as much as possible is a major challenge for all mortgage players in the US.
Debts. The company has a very large amount of debt - 3.451 billion, out of which, however, only 365.9 million needs to be repaid during the year. But the money directly at her disposal is not so much: 27,6 million on accounts and 194.3 million debts of counterparties. She has a lot of debt, and this will scare off a lot of investors in the light of raising rates and more expensive loan servicing.
What's the bottom line?
We take shares now by 69,34 $. And then there are two options for the development of events:
- over the next 20 months the deal will be closed, and we'll get money and ICE shares, maybe, only money;
- the company will not be bought. This is not ideal, but, because BKI is a good company, it makes sense to hold these stocks next 10 years, for her to show her potential in solo swimming.
Since ICE will pay in part with its shares, it makes sense to take a certain amount of BKI shares, to get exactly the whole share of ICE in the end. It should be based on the price of ICE shares - at the moment it is 98,27 $, and in this case one should take 7 BKI shares. But, as i said above, ratio may change.