FactSet Research Systems Inc. (FDS) provides integrated financial information and analytical applications to the global investment community. The company reported fiscal first quarter earnings which were in-line with estimates but missed on revenues by less than a million. The revenues model is subscription based with enterprises paying roughly $20k-$25k per user annually.
One thousand new users would equate to about 2.6% revenues growth at the current revenues level. So, being able to add one thousand to two thousand new users annually in the global financial industry should not be too difficult of a task. The switching costs, time and training, can be prohibitively high for financial institutions. Consequently, of both of the aforementioned, I can see continued revenues growth over the next three years.
Financial institutions can offset the cost of a subscription with an investment in FactSet. Based on the current dividend, an investment of just under $2M would yield enough to cover the $25k subscription fee, excluding taxes. Investing in FactSet can reduce operating expenditure.
I think of an investment in FactSet in two parts. What is my outlook for financial markets (because of the buy-side client base), and how much am I paying for shares? So, the next three years in the financial industry should generally be rosy on inexpensive money and global economic momentum. When I think about the valuation, I say 24.4 times earnings isn't pricey, but I would like to get shares closer to 22-22.5 times earnings, about $100 per share.
- On September 1, 2013, Revere Data, LLC, which built an industry taxonomy that offers investors a unique way to classify companies and analyze how they fit in the global economy, was acquired for $15.4M.
- Goldman initiated FactSet at Sell with a PT of $97 on rosy consensus estimates; hopefully Goldman turns out to be right, so that I can buy shares of FactSet below the current valuations.
- Van Eck's Market Vectors Exchange Traded Funds were integrated into the FactSet platform.
- A $0.35 per share dividend was paid on December 17, 2013, following the November 14th announcement.
- The Norwalk, Connecticut-based FactSet acquired 60% of Matrix Limited, a provider of intelligence to the UK financial services industry, in December 2013.
FactSet Research Systems Inc. is a provider of integrated financial information and analytical applications to the global investment community. FactSet combines content regarding companies and securities from major markets all over the globe into a single online platform of information and analytics. By consolidating content from hundreds of databases with powerful analytics, FactSet supports the investment process from initial research to published results for buy and sell-side professionals. The company's revenues are derived from subscriptions to services, content and financial applications. Approximately 81.6% of FactSet's revenues are derived from investment management clients and the remainder is from investment banking firms who perform M&A advisory work and equity research.
FactSet has a history of net revenue growth. The company's net revenue has grown for 33 consecutive years with 17 consecutive years of earnings growth. Increasing net revenues is partly attributable to international expansion.
Bloomberg L.P., Thomson Reuters Inc., and Standard & Poor's Capital IQ are FactSet's main competitors. Bloomberg and Thomson Reuters comprise about 61% of the $25 billion global market data and analysis space. There are numerous other competitors, such as Morningstar Inc., MSCI Inc., and Interactive Data Corporation. I estimate that FactSet has just over a 3% market share.
FactSet competes at the high end of the market with Bloomberg and Thomson Reuters. Thomson Reuters also offers middle market solutions. Bloomberg offers high-end solutions. Competition is fierce at the high end of the market, but FactSet offers a competitive solution, based on my experience.
The total number of clients increased 15 consecutive quarters as reported total clients stood at 2,500 at the end of fiscal 2013. The client count increased by 108 in fiscal 2013 and 155 in fiscal 2012. Total users increased 2.9% in fiscal 2013, which means that net revenues growth was also attributable to higher revenues per user.
Cash generated is being returned to shareholders. FactSet's shareholder capital return program was active in fiscal 2013; the company returned 154.5% of free cash flow to investors. I expect scaled back capital distributions during fiscal 2014, but fiscal 2015 capital distributions could be significantly larger. Additionally, the capital expenditure requirements appear to be structurally relatively small, so investors should be able to expect relatively large capital distributions in future periods.
During the fiscal first quarter, FactSet announced a $300M expansion to the existing share repurchase program and generated $222M of revenues, which was the lower end of management's guidance. Adjusted diluted EPS of $1.22 was at the midpoint of the guidance range; this assumes the U.S. Federal R&D tax credit is re-enacted. Mid-single digit growth for a company in a mature industry is in-line with the long-term sustainable growth rate that I estimate.
Management is forecasting second quarter results in-line with recent growth, which is unsurprising considering the subscriptions based business model. Fiscal second-quarter revenues are forecasted to increase just over 5% at the low end. The U.S. Federal R&D tax credit probably will remain expired during FQ2; thus, the forecast is for GAAP diluted EPS between $1.20-$1.23.
Financial market volatility can weigh on the results of operations as about 80% of FactSet's clients are buy-side financial institutions.
Foreign currency exchange rate exposure is significant as 70% of FactSet's employees and 45% of its leased office space are located outside of the U.S.; but FactSet utilizes derivatives to reduce the foreign exchange risks.
The share price is volatile and is likely to remain volatile.
The enterprise is trading at 24.4 times trailing earnings while the S&P 500 trades at 17.9 times trailing earnings. I view FactSet as a company that should trade at a 20%-25% premium to the market because of the business model. On a forward PE basis, FactSet is moderately overvalued at about 23 times forward earnings. These shares are going to be difficult to buy right now, but I don't want to pay more than $105 for shares, and I would rather pay $100 per share or about 22 to 22.5 times earnings.
Price/book value and price/sales are relatively high, but price/book is skewed by share repurchases. At the same time, the market is paying a substantial premium for sales -- 5.6 times. The premium is partly a growth premium and partly a premium for the stability of this subscription model. The profitability also accounts for a portion of the price/sales premium. The premium is attributable to excellent business fundamentals.
I'm bullish on the three year outlook. I think we'll still be in a low interest rate environment. Generally, asset prices will remain inflated, which should result in incremental revenues growth for FactSet on increased buy-side expenditure. Longer term, I don't foresee us not needing the global data providers as data quality remains a cornerstone of the investment industry.