When Al Gore launched Generation Investment Management in 2004, ESG (environmental, social, and governance) investing was a novelty. However, thanks in part to Gore’s efforts to increase public awareness of the issues surrounding climate change, ESG funds have grown exponentially.
At the end of 2020, US-based ESG fund assets under management reached $17.1 trillion. Generation Investment Management has approximately $36 billion in assets under management, and every penny goes into companies that it deems are committed to not damaging the environment and have long-term oriented stakeholder cultures.
As of September 2021, Generation Investment Management’s top five holdings include:
The fund also reported several new additions to its portfolio during the third quarter. One of the most interesting is Clarivate, a digital information and analytics company with an ambitious vision: to improve the way the world creates, protects, and advances innovation.
How does Clarivate’s vision mesh with Generation Investment Management’s mission? Specifically, why is Al Gore’s fund buying Clarivate?
Clarivate: A Thomas Reuters Spinoff
Clarivate wasn’t always its own entity. Before 2016, it was the division of Thomson Reuters that specialized in intellectual property and science. When Clarivate was divested from Thomson Reuters, it became an independent company. It began trading publicly in 2019 through a special purpose acquisition company (SPAC) merger.
At its core, Clarivate is a company devoted to information. Through its robust line of subscription-based products, Clarivate makes it easier for innovators to gather and analyze data, then protect their findings, leading to breakthrough solutions for the world’s most difficult problems.
Clarivate has a global presence, and clients include some of the most brilliant minds in the world. Universities, publishers, nonprofits, corporations, law firms, and government agencies rely on Clarivate products to increase the pace of research so that life-changing solutions to complex problems come to market as quickly as possible.
The Clarivate MOAT Is Widening
Clarivate’s deep experience in data, analytics, and the complicated path to obtain and protect patents and trademarks creates a moat that competing firms cannot match.
While there are other companies specializing in research, analysis, IP solutions, and trademark/patent management, few have the ability to skillfully provide all of these services on demand.
In addition, Clarivate has certain intangible characteristics that create another kind of moat: brand. For example, within the markets Clarivate serves, the company name is well-known and respected. This reputation for expertise and excellence in execution draws new clients in, minimizing the need for customer acquisition efforts.
Clarivate Revenue, Earnings Growth
Clarivate reported its third-quarter results on October 28, 2021, and investors were reasonably content with the company’s progress.
Total revenues for the third quarter came in at $442.1 million, which represents a 55 percent year-over-year increase. Adjusted revenues totaled $442.2 million – a 54 percent year-over-year increase.
Revenues weren’t the best news of the day. Investors were more interested in the quarter’s income, which also showed significant improvement.
The net income of $0.9 million or $0.47 per share was a 100 percent improvement year-over-year, ending a streak of losses.
Adjusted net income came in at $113.6 million – an increase of 94 percent – and adjusted income per diluted share (EPS) totaled $0.16.
These figures served to reassure investors who had expressed concern over Clarivate’s seeming inability to turn a profit. Thanks to a variety of measures, including acquisitions of complementary businesses already delivering profits, Clarivate appears to be turning its losses around. If the trend holds, Clarivate may begin to see share prices increase.
Clarivate Margins Rising
Understanding a company’s true profitability against industry peers requires a careful look at earnings before interest, tax, depreciation, and amortization (EBITDA).
Specifically, comparing EBITDA to total revenue reveals the EBITDA margin, or total operating cash generated for every dollar of revenue a company earns. The EBITDA margin can be calculated by dividing EBITDA by total revenue.
When margins are calculated for Clarivate using the company’s adjusted EBITDA of $190 million, the adjusted EBITDA margin comes out to 43 percent. That represents an increase of 520 basis points – a clear indication that the company is moving in the right direction.
More importantly, management expects further progress in the fourth quarter, projecting the EBITDA margin between 44 percent and 45 percent.
Is Clarivate Too Reliant On Acquisitions?
Clarivate has a strong family of products that serve industries focused on innovation – for example, it has robust offerings in scientific and academic research, biopharma intelligence, medtech intelligence, and IP intelligence. However, to date, Clarivate has struggled to generate profits from its core businesses. It is only through acquisitions that Clarivate has made any progress in moving out of the red and into the black.
That’s problematic because strategies based on buying profitability over growing it organically are rarely successful long-term unless the company has highly skilled leaders.
A potential downside of buying Clarivate is that at the moment, nearly every member of the executive leadership team is new to the organization. The few that have some history with the company are from acquisitions.
The newly formed leadership team may have what it takes to fulfill Clarivate’s potential and create value. However, it’s too soon to predict with any measure of certainty just how well each will fare as an individual contributor and whether the group will come together as a cohesive, effective team.
Investors with low risk tolerance may prefer to sit this one out for now, and those who choose to buy Clarivate stock should monitor its progress carefully.
Is Clarivate A Good Investment?
Clarivate’s products and services fill an important need, and they are in demand among an elite group of researchers, entrepreneurs, and innovators.
As a company, Clarivate has specialized expertise in complex areas of data, analytics, and legal protections for original ideas. However, investors and analysts have mixed feelings in terms of whether Clarivate is a good investment.
The long road to sustainable profitability is one issue that keeps shareholders up at night, and it doesn’t help that Clarivate’s most recent acquisitions have diluted stock. With that said, the company’s leaders have developed an aggressive growth strategy, and many industry experts have indicated their confidence in Clarivate’s ability to deliver.
Ultimately, Clarivate looks most promising as a long-term addition to an otherwise diversified portfolio. The argument to buy Clarivate stock is even more persuasive when Al Gore’s fund’s perspective is taken into consideration.
Why Is Al Gore’s Fund Buying Clarivate?
Clarivate lost nearly 20 percent of its value in the past year, which makes the current share price a bargain if you believe that the company is on a growth trajectory. The investment research team at Al Gore’s fund, along with a number of others, are confident of Clarivate’s long-term success. This played into the fund’s decision to buy Clarivate stock.
However, after growth potential, Generation Investment Management looks at additional criteria before adding any stock to its portfolio.
Specifically, companies must be committed to the same sustainability goals that set Generation Investment Management apart, and they must be open to receiving feedback, guidance, and support from stakeholders to improve their ability to achieve sustainability goals.
Clarivate considers itself an ESG company, and its Senior Director of Global Sustainability described its perspective this way:
Sustainability is much like being ‘healthy’. You are never done in its pursuit. It becomes core to who you are and how you choose to exist, every day – always looking to do better. At Clarivate, sustainability is part of all we do and who we are – for today and for the future.
In other words, Clarivate’s values dovetail with Generation Investment Management’s mission, making it a strong choice for ESG investing.
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