IHS Earnings Preview: Stock Is Too Rich Amid a Leadership Change

NEW YORK (TheStreet) -- Data analytics specialist IHS (IHS) will report fiscal second-quarter earnings results Tuesday before the opening bell, and though the stock is up more than 8% this year, besting the broader averages, it requires a high frustration threshold to hold these shares.

Shares of the company Englewood, Colo.-based company, which provides information and data mining to governments and businesses, have been all over the map so far this year.

And if the abrupt resignation of the company's Chief Executive Scott Key serve as an indication, IHS has more challenges ahead, beyond its recent struggles with revenue and margins.

Complicating matters, IHS stock is expensive, trading at 42 times earnings, which is twice the valuation multiple of the average stock in the S&P 500 (SPX) index.

Even when compared with the relatively expensive iShares North American Tech-Software ETF (IGV), which trades at a price-earnings ratio of 30, the premium price of IHS shares stand out even more. And the exchange-traded fund is home to prominent software and Internet stocks such as Microsoft (MSFT) and Salesforce.com (CRM).

So when assessing IHS, whose fiscal 2015 earnings are projected to decline almost 1% from fiscal 2014, its reasonable to ask, where is the value?

Granted, the market for data analytics and other forms of information -- the type that help businesses make smart decisions -- is projected to grow in the next couple of years, according to research firm IDC.

This would make IHS an interesting play, especially with its access to government contracts.

At the same time, there are also tons of better-run businesses that are competing. The likes of Accenture (ACN) and IBM (IBM) are two examples, and they don't come with the sort of operational risk that is sparked by a sudden leadership change.

On June 2, IHS said that its Chairman, Jerre Stead would assume the CEO role, replacing Key, who resigned -- as the report says -- due to personal reasons.

And the "effective immediately," part doesn't inspire confidence that this was planned, especially when Key also resigned from the company's board.

"We have mutually agreed with Scott that it would be in the best interest of IHS to end our relationship," Stead said in a statement on June 2.

And this would explain why analysts' average earnings estimates for the just-ended quarter has been down more than 6% in the past three months, now at $1.45 a share, from $1.55 a share. Likewise, because IHS announced results for its fiscal first quarter (reported in March), earnings estimates for the fiscal third quarter ending in August and for the full year ending in November are down 7% and 5%, respectively.

Declining earnings estimates isn't a good sign for any company, much less a company dealing with a sudden change in leadership, whose shares trade at expansive levels. In that vein, investors would be better served taking profits now ahead of Tuesday's results and wait to hear what the company says about its outlook for the rest of the year and beyond.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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