Clarivate: Attractive Upside Even With Conservative Assumptions

Investment Action - Clarivate Plc (NYSE: CLVT) is recommended as a buy due to expected organic growth recovery as the macro environment improves, with no structural weaknesses identified in the business [2] - The organic growth recovery story remains intact, with improvements noted in the two largest segments [2] Earnings Review - In Q2 2024, CLVT reported a revenue decline of 2.8% on a reported basis and 0.6% on an organic basis, with transactional revenue down 4.1% and subscription revenue up 0.7% year-over-year [3] - EBITDA margin contracted by 40bps to 42.2%, but EPS exceeded consensus expectations at $0.20 compared to $0.18 [3] - Organic growth improved from -1.7% in Q1 2024 to -0.6% in Q2 2024, driven by the Academia & Government (A&G) and Intellectual Property (IP) segments [3] Segment Performance - A&G segment organic growth accelerated from 0.6% in Q1 2024 to 1.3% in Q2 2024, with subscription revenue growing over 3% and renewal rates exceeding 96% [3] - IP segment organic growth improved from -4.5% in Q1 2024 to -1.8% in Q2 2024, indicating stabilizing trends in trademark search volumes [3] - Life Sciences & Healthcare (LS&H) segment saw a decline in organic growth from 2.8% to 3.9%, attributed to a weak macro environment affecting large pharma budgets [5] Market Outlook - The long-term trend indicates that R&D expenditure typically increases over time, suggesting a potential recovery following the current macro downturn [5] - Expectations for a strong recovery in the LS&H segment by FY25 as pharma companies resume R&D initiatives [5] Valuation - Current valuation at 6.5x forward PE is considered cheap, with potential upside if growth accelerates to 3% by FY26 and margins improve to 22% [7] - Historical margins ranged between 23-25% from FY20 to FY23, with a target of 22% by FY26 [9] Key Takeaways - A&G segment is expected to return to historical low single-digit growth rates as the macro environment improves [8] - IP segment is likely to continue its organic growth improvement as CLVT gains market share [8] - Recovery timing for the LS&H segment is contingent on macroeconomic recovery, anticipated by FY25 [8]