I have been following FactSet Research Systems Inc. (FDS) for a long time now as it consistently appears on the primary stock screening tool that I employ in short listing companies (see my profile for further details). It is the undisputed leader in providing financial and economic information to companies worldwide and enjoys a monopolistic position.
FactSet Research Systems Inc. (FactSet) is a provider of integrated global financial and economic information, including fundamental financial data on a number of companies worldwide. FactSet offers access to financial data and analytics to investment professionals worldwide. Its applications support and make workflows for buy and sell-side professionals. These professionals include portfolio managers, research and performance analysts, risk managers, marketing professionals, sell-side equity research professionals, investment bankers and fixed income professionals. Its applications provide users access to company analysis, multicompany comparisons, industry analysis, company screening, portfolio analysis, predictive risk measurements, alpha testing, portfolio optimization and simulation, real-time news and quotes and tools to value and analyze fixed income securities and portfolios.
(Source - Google Finance)
Apart from being a debt free company, FactSet has also historically maintained strong financials and routinely beats the industry metrics. Key financial information for FactSet is shown below:
- Market Cap = $2.5 Billion
- Sales = $613.28 Million
- Income = $136.27 Million
- Net Profit Margin = 22%
- Industry Average Profit Margin = 19%
- Debt to Equity ratio = 0.0
- Return on Equity = 30%
- Current Ratio = 2
FactSet is an indirect way of gaining exposure to the financial sector, a sector that I usually avoid. With the recent meltdown in the financial sector, FactSet stock fell from a high of $72 in November 2007 to $31 in November 2008. Since then, the stock has recovered and currently trades at around $53 a share.
Current and Projected Earnings
- TTM EPS = $2.76
- TTM P/E = 19.14
- 2009 EPS estimate - average (year ending September, 09) = $2.85
- 2010 EPS estimate - average (year ending September, 10) = $3.00
- 2010 EPS estimate - low end = $2.82
- 2010 EPS estimate – high end = $3.10
In performing relative valuation for FactSet Research Systems, I chose to compare the historical and current P/E ratio of FactSet with the corresponding P/E ratio of the S&P 500 index. Comparing FactSet with its peers was a futile exercise since FactSet is leagues ahead of its nearest rivals. The current and historical multiples for FactSet and S&P 500 index are shown in the table that follows:
FactSet P/E (1)
S&P 500 Index P/E (2)
As shown in the Table above, historically, FDS has traded at a P/E (FDS) to P/E (S&P 500) ratio of 1.23. It currently trades at a ratio of 1.15. However, based on the consolidation of its client base (due to the merger/closure) and the overall sentiment in the financial sector, I believe that FactSet should trade near the low end of its historical P/E (FDS) to P/E (S&P 500) ratio.
Therefore, applying a ratio of 1.05 and assuming a modest correction in S&P 500 from these levels (P/E = 16; S&P 500 trading at 860), FactSet is projected to be trading at a multiple of 16.8.
Fair Value (based on relative valuation) = 16.8*2.76 = $46.36
Valuation Based on PEG
Projected long term (5 years) growth rate = 15%.
Applying a PEG ratio of 1, the fair value of FDS = 15*$2.76 = $41.4.
By combining the derived values, I am initiating coverage of FactSet Research Systems Inc with a SELL rating and a 12-month price target of $45.
You can follow the performance of this stock and all other stocks that I will be covering on the following page.