Morgan: Hard Facts for FactSet

Fascinating data point Monday in the overall hand wringing about the general malaise on Wall Street.

FactSet Research (FDS), which made $475 million in last year selling software to banks and hedge funds, is headed for hard times as Wall Street retrenches, writes J.P. Morgan analyst David Lewis in a note this morning initiating coverage on the data broker.

FactSet stock has already felt the pain this year, its shares up only about 1% or so, but there’s more pain ahead, says Morgan, writing that “Our channel checks of competitors, hiring firms, and recruiting departments in business schools indicate that the financial industry job environment is becoming increasingly more challenging.” FactSet sells programs backed by proprietary databases of financial and economic information, which can be used for things like comparing the alpha generated by various analyst recommendations. (Hmm, could use that here at TT Daily…) That’s a $15 billion market, of which FDS has just 2.5% share, notes Lewis.

FactSet hasn’t seen much of a hit from Wall Street’s credit crunch, but the worse may be yet to come, writes Lewis. While sales grew 28% in the first fiscal quarter ended in November, says Lewis, sales could be hit by slowing real GDP growth in the current and following two quarters of between 1.5% and 2.5%. That could lead to pink slips on the M&A teams at FactSet’s customers. Observes Lewis, “Notably, layoffs on the sell-side are almost an immediate hit to revenue as passwords are canceled real-time.”

Things won’t be as bad for FactSet as the 2001 to 2003 downturn in financial markets, Lewis thinks. That’s because budgets are already leaner on the Street, meaning there’s less cutting to be done, and because FactSet’s products are somewhat more mission critical, if you will, then in past years, because they’ve become more a part of the day to day “workflow” on Wall Street.

Lewis has a Neutral rating on the shares, which are trading at 23 times profit per share for the year ending next August, by his estimate. He says to hold off until the global M&A scene improves.

Monday, FactSet shares are down about 1% at $57.68.