FactSet Research Systems: Is Wall Street Correct?

Sep.28.10 | About: FactSet Research (FDS)

FactSet Research Systems (NYSE:FDS) is a provider of global economic and financial data to investment management and investment banking professionals. Its applications are an integral part of the workflow of subscribing financial professionals. FDS recently declared financial results for FY 2010 modestly beating analyst expectations, capitalizing on improved spending on investment tools.

Wall Street is bullish on FDS. The consensus price target for FDS has risen during the last 90 days from $76 to $91. However, Stifel Nicolaus analyst Shlomo Rosenbaum cut the stock from Buy to Hold last week citing the 25% run up in stock price over the last 3 months. He recommends buying the stock in low $70s.

In this article, I will attempt to estimate the fair value of FactSet Research Systems stock and determine whether going against the majority of Wall Street makes sense.

Company Financials and Valuation

  • Market Cap = $3,701 million
  • Sales (TTM) = $641 million
  • Income (TTM) = $150 million
  • Net Profit Margin = 23.4%
  • Return on Equity (TTM) = 29.9%
  • Return on Equity (last 5 years) = 28.73%
  • Return on Assets (TTM) = 23.5%
  • Return on Assets (last 5 years) = 22.5%
  • Current Ratio = 2.43
  • TTM EPS = $3.13
  • Average Analyst 2011 EPS Estimate = $3.50
  • Average Analyst 2012 EPS Estimate = $3.98

Discounted Cash Flow Valuation

DCF valuation of FDS was performed by employing a two-stage model with a high growth period of 10 years. The major inputs and the valuation results are presented below. The growth rate used as part of this analysis was based on a combination of fundamental analysis, company guidance and average analyst estimates.

FDS

High Growth Period

Bottom-Up Beta for High Growth

1.33

Risk Free Rate

2.75%

Risk Premium

6.5%

Cost of Equity (Year 1-5)

11.40%

Average Cost to Equity (Years 6-10)

10.25%

Average Growth Rate (Years 1-5)

15%

Average Growth Rate (Years 6-10)

8%

Stable Growth Period

Bottom-Up Beta for Stable Growth

1.0

Risk Free Rate

4%

Risk Premium

5.5%

Cost of Equity

9.5%

Growth Rate

3%

Valuation

Present Value of FCFE in High Growth Period (millions)

$1.219.75

Present Value of Terminal Value of Equity(millions)

$1,987.79

Cash and Marketable Assets (millions)

$196

Market Value of Equity

$3,403.53

Market Value of Equity/Share

$74

Click to enlarge

Relative Valuation

The estimated fair value using various relative valuation methods is presented below. It should be noted that the data from the last 4 financial years was taken in calculating the estimates shown in the table. Adjustments were made to account for outliers present in the dataset.

FDS

Current

Estimate

Fair Value

P/E

25.7

23.97

$75

P/S

5.77

5.42

$76

P/FCF

24.22

27.13

$90

(P/E) / (P/E – Peers)

1.26

1.01

$65

(P/E) / (P/E – S&P 500)

1.37

1.22

$72

Average

$76

Click to enlarge

Fair Value

Based on the analysis results shown above, the fair value of FDS is $75 a share. As of September 27, 2010, the stock was trading at $80.46 and was overvalued by approximately 7%. Therefore, my analysis results are consistent with the analyst from Stifel Nicolaus. In my opinion, this stock is a short candidate if you believe that a minor correction in S&P 500 is warranted (which I do). Based on the most recent data, FDS had a short interest ratio of 6.75% (2.8 million shares).

(Kindly use this article for information purposes only. Please consult your investment advisor before making any investment decision.)

Disclosure: No positions