FactSet sets fundamental bar high, but stock isn’t cheap (FDS)

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Information and innovation are now at the forefront of capital market growth. It’s no wonder that data and financial solutions providers are experiencing an upsurge in business. Over the past decade, FactSet Research Systems Inc. (NYSE: MSDS) accelerated its growth. Its acquisitions expanded its capacity as more and more clients poured into the capital market. Fortunately, this appears to be fruitful as revenue and margin expansion remain solid. It maintains stable cash levels and stable financial leverage. As such, it can support its expansion, borrowing and dividends. Still, the stock price seems divorced from its impressive fundamentals.

Business performance

FactSet provides financial data and analytics, and software solutions to customers around the world. For more than four decades, it has adapted to market changes and digital transformation. From its offices across the regions, it works to create value for its stakeholders. Today, it remains a valuable platform for asset managers and other investment professionals.

Its revenue comes primarily from customer subscriptions. It gives them access to financial data and analysis, aggregated market data and other software solutions. In its financial segment, the raw materials come in the form of financial reports, which the analyst rearranges using an app. The accounts are reclassified according to FDS accounting principles. Even so, it is still consistent with GAAP used in financial reporting. Financial data appears as simplified financial statements with financial ratios and workflow information. Even better, they can access global market information and industry trends. The app also allows clients to monitor their portfolio performance and execute trades. As such, FDS provides a seamless user experience in data analysis and risk management. It combines its technology offerings and data solutions with its customer services.

Its operating income of $431 million is a 10% year-over-year growth from $392 million in Q2 2021. Driven by increased demand for research, consulting and analytics solutions. He is also motivated by his prudent acquisitions, investments and disposals. Although its peers have similar offers, the opportunities remain high. Information and technology remain at the forefront of market developments. Moreover, differentiated content is what sets every business apart from the rest. Compared to its closest peers, it holds a market share of 6.2% compared to 6.1%. Additionally, its revenue growth is above the peer average of 8.8%. I included S&P Global (SPGI) since it owns Capital IQ, a direct competitor. Similarly, the London Stock Exchange Group (LSEG) has Refinitiv.

FactSet Operating Revenues

Operating revenue (Market watch)

FactSet market share

Market share (Market watch)

But what makes it enduring is its strong following. He has 90% customer loyalty and 5% increase in the number of users. Of course, sustained growth is not driven by market demand for content alone. In fact, it’s one of the companies capitalizing on cautious M&As and investments. These appear to be successful, allowing FDS to improve digital capabilities and data management strategy. Even better, they help accelerate its revenue growth while improving its productivity. It shows that FDS maintains effective asset management as it expands its capacity. Costs and expenses increase but remain relatively lower than operating income. Thus, the operating margin without exceptional charges is even higher at 32%.

FactSet Operating Margin

Operating margin (Market watch)

This year, FactSet estimates its operating revenue to be $1.8–1.83 billion. Meanwhile, their operating margin estimate, including one-time charges, is 26%. I also have an optimistic view, but my estimate is less than $1.72 billion. It is in line with average revenue growth in recent years and quarterly values. This may be a conservative estimate, given the potential impact of inflationary pressures.

FactSet Operating Revenue Outlook

Operating revenue (2Q 2022 report and author’s estimate)

Why FactSet Research Systems Inc. can maintain its success

The capital market is expanding but is facing macroeconomic pressures. Inflation increases operating costs, but its impact can extend further. This can affect the market as it erodes the value of earnings. As such, it can be difficult to assess the value of companies, especially those that are part of stock indices. This also applies to the FDS, given that it is part of the S&P 500.

Fortunately, FactSet Research Systems Inc. continues to demonstrate strong performance. Its steady revenue growth and expanding margins remain evident. Even better, it is now better able to meet the needs of more customers and improve its processes thanks to its recent mergers and acquisitions. It continues to expand its offering in the private market and improves workflow solutions through targeted investments. The broad scope of its data and analytics enables it to offer more accurate insights and solutions. It can even maximize its untapped potential in other regions. Note that more than 50% of its income comes from the United States. The United States alone understands $121.9 trillion, which accounts for more than half of the world’s market capitalization. $39 trillion comes from the Asia-Pacific region, while $45 trillion is the combined value of other regions.

For more efficient trading and market settlement, FDS now owns CUSIP Global Services (CGS). In turn, the company is offering $1 billion in senior notes. As such, FactSet will play a more crucial role in the capital market. This may attract more demand since CUSIP operates as a provider of a single common language or code for financial instruments across exchanges. FactSet can streamline its products and workflow capabilities by using it.

Besides its ability to expand, FactSet shows its sustainability through its strong balance sheet. It has impressive liquidity, given its stable cash levels and financial leverage. Its cash and cash equivalents of $808 million are 30% higher than in 2Q 2022. Meanwhile, borrowings are lower at $838 million versus $884 million. But, it will have a substantial raise, given the issuance of its senior notes to acquire CUSIP. Even so, this decision can pay off in no time. Note that the entity covers 170 million dollars of income in S&P Global. It’s also a staple in the financial market, which makes it an advantage for FactSet. Additionally, FactSet continues to generate positive cash inflows, increasing its cash levels. Currently, cash covers 34% of total assets, so it remains very liquid. Additionally, net debt/EBITDA is low at 1.34x. If we add the senior ratings, the ratio will be 2.96x. But, it is still below the maximum range of 4x. This means that the company has sufficient income to cover its borrowings.

FactSet Cash and cash equivalents and borrowings

Cash and cash equivalents and borrowings (Market watch)

FactSet may also need to be careful with its Goodwill since it already represents 33% of total assets. But, it is typical for S&P 500 companies to have a 30-40% percentage as they acquire more assets and businesses. Plus, it’s still below the maximum percentage of 40%, so FactSet isn’t overspending yet. Its deep value and growth remain attractive, which can generate more revenue.

Stock price valuation

FactSet’s stock price has fallen sharply since the end of the previous year. To $354.36, it has already been reduced by 26% compared to its starting price. Still, it doesn’t seem to be cheap. These measures show that the stock price is not yet fairly valued. The same goes for its close peers, making FDS the second most valuable stock on the list.

P/E ratio

P/B ratio

EV/EBITDA

set of facts

32.13

10.88

23.56

Thomson Reuters

29.23

4.29

31.17

the morning star

53.87

7.24

26.70

Tradeweb

58.02

2.99

MarketAxess

41.49

9.76

25.97

When it comes to its dividend payouts, the company remains consistent and generous. The amount increases by 11% on average. Additionally, he is part of Dividend Contenders as he has been paying and raising dividends for over 20 years. But, the dividend yield is only 1%, which is much lower than the S&P 500 average. To better assess the price, we can refer to the DCF model and the dividend discount model.

DCF model

FCFF $426,150,000

Cash and cash equivalents $808,000,000

Borrowings $838,000,000

Growth rate to infinity 4.8%

WACC 9.2%

Common shares outstanding 37,884,000

Share price $354.36

Derived value $288.88

Dividend discount model

Share price $354.36

Average dividend growth 0.1111541418

Estimated dividend per share $3.42

Cost of capital Equity 0.1238053439

Derived value $300.3843446 or $300.38

The value derived in both models confirms the potential overvaluation. The stock price may still be expensive even after the downward trend continues. As such, there is a potential price drop of 16-20%.

Conclusion

FactSet Research Systems Inc. is a very solid, viable and liquid company. It develops while keeping its fundamentals solid and intact. But even though it’s a strong buy for me, the price doesn’t seem cheap today. Moreover, it is not an attractive dividend stock, given the low dividend yield. The recommendation is that FactSet Research Systems Inc. is an expectation.

About Barbara J. Ross

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