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FactSet (FDS) Benefits From Organic Growth, Competition Rife

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In a year’s time, shares of FactSet Research Systems Inc. (FDS - Free Report) have gained 23.9% compared with the industry’s rise of 21.1%

The company’s fourth-quarter fiscal 2018 earnings and revenues missed the Zacks Consensus Estimate. Adjusted earnings per share (EPS) of $2.20 lagged the consensus mark by 2 cents but improved 15.8% year over year. Revenues of $345.9 million missed the consensus mark by a slight margin but rose 5.9% on a year-over-year basis.

Nevertheless, FactSet has an impressive surprise history. It beat earnings estimates in three of the trailing four quarters, the average being 1.9%. For the first quarter, the consensus estimate for earnings declined marginally in the past 30 days.

Continuous Organic Growth

The company continues to grow organically on the back of higher sales from international price increase and analytics, data feed products as well as workstations. In the reported quarter, organic revenues improved 5.3% to $347.1 million, primarily owing to accelerated sales of content and technology solutions (CTS), analytics products as well as wealth management solutions. Region-wise, FactSet reported 5% organic growth from the United States and 6% internationally. The company’s ASV organic growth rate was 5.7% in the reported quarter.

Strengthening Global Presence

In a bid to strengthen global presence, the company has recently opened a new office in Shanghai to provide data and analytic solutions for an increasing number of investors and investment managers in China. Notably, the company’s ASV recorded 11% growth from the Asia-Pacific region in the last reported quarter. The region also witnessed new client addition and higher sales to existing clients.

Moreover, FactSet is enjoying robust growth across the European operations as it generates around 25-27% of revenues from the region. In the fourth quarter, the company’s ASV recorded 5% organic growth from Europe.

Consistency in Rewarding Shareholders

FactSet’s consistent record of returning value to shareholders in the form of dividend and share repurchases also raise optimism.

On Aug 10, the company declared quarterly cash dividend of 64 cents per share that was paid on Sep 18, 2018 to shareholders of record at the close of business on Aug 31. FactSet has an impressive dividend payment history. In fiscal 2017 and fiscal 2016, the company paid dividends of $80.9 million and $74.2 million, respectively.

On the share repurchase front, the company repurchased 329,478 shares for $67.5 million in the last reported quarter. The company still has $241.7 million under its existing share repurchase program. In fiscal 2017, FactSet repurchased 1.6 million shares for $252.8 million compared with 1.5 million shares for $232.3 million in fiscal 2016. Such moves indicate the company’s commitment to create value for shareholders and underline confidence in the business.

Risks

FactSet’s balance sheet is highly leveraged. As of Aug 31, 2018, long-term debt was $574.78 million, while cash and cash equivalents were $208.6 million. Such a cash position implies that the company needs to generate adequate amount of operating cash flow to lower debt burden. Also, high debt may limit the company’s future expansion and worsen risk profile.

The company continues to face tough competition from other players in the market that provide financial market data, analytics and related services. These competitors may be able to expand their offerings and data content more effectively, price their products more aggressively or respond more rapidly to situations developing in the marketplace to attract new clients and retain existing ones. In spite of enjoying a technological advantage, pricing pressure continues to be a major headwind.

Zacks Rank & Key Picks

Currently, FactSet carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the broader Business Services Sector include Paychex, Inc. (PAYX - Free Report) , Broadridge Financial Solutions, Inc. (BR - Free Report) and The Interpublic Group of Companies, Inc. (IPG - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The long-term expected EPS (three to five years) growth rate for Paychex, Broadridge and Interpublic is 8%, 10% and 7.7%, respectively.

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