Factset Research Systems (FDS.N) has long been a market favorite, with shareholders enjoying a return in excess of 150% over the last five years – far above that of the S&P 500. Lately, however, the love affair seems to be cooling off.
FactSet consolidates tools to monitor global markets, public and private companies, equity and fixed income portfolios in a single interface. The stock has an organic growth story, fanatical customer service and a well-positioned solution that is central to the decision-making process of many of the world’s asset managers and banks.
Source: Eikon / StarMine
Full disclosure: Factset is one of the main competitors to the Thomson Reuters Financial and Risk division; providing financial information to both buyside and sellside market participants. Alpha Now is our website.
The times are a-changing …
The key drivers of FDS price performance have been strong market share gains and increased recurring revenue from ASV – annual subscription value that represents forward-looking revenues for the next 12 months from all services currently being supplied to clients. However, in recent quarters one can see a significant slowdown in revenue growth. That slowed growth doesn’t yet seem to be reflected in the share price.
Source: Eikon / StarMine
The sellside gets tough
There’s been a marked reduction in cheerleading from sellside analysts, with two buys, three holds and three sells. The majority of downgrades are on valuation grounds; there’s no concern over the quality of the company’s management, personnel or assets. The mean price target is $104.14, while FDS is currently trading at $109. It’s more typical to have the price target at a 10-20% premium to the share price.
So how does StarMine see the situation? Quite similarly – with top decile credit quality metrics that are a reflection of the quality of the underlying business – but concerns in the areas of analyst revisions and relative and absolute valuation measures.
Source: Eikon / StarMine
Mojo regained?
The question FDS stockholders need to consider is whether FDS can regain its mojo and return to double digit earnings growth. In the second chart, you can see a slight and uninspiring increase in sales growth forecasts for 2014. To remain a believer, the bull case really requires any of three things: (1) continued gains in market share from Bloomberg, Thomson Reuters and others (2) industry headcount starting to increase again, or (3) an improvement in the average spend of each user.
Each of the options has its own challenges, with the third option seeming the path of least resistance; it’s always easier to sell something to an existing customer than to create a new one. Note, however, that budgets remain locked down and firms continue to look for ways to strip spending from their cost bases.
Risk/reward finely balanced
Most investors look for an asymmetric risk profile – a risk of a small loss or a large gain. Here, unfortunately, if the muted growth of 2011/2012 represents a new and structurally lower growth profile then it may be time to look for a new market sweetheart.
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