Overpriced FactSet Facing Margin Pressures
The wide-moat firm will only be able to achieve growth of 5%-5.5% over the next two fiscal years.
Wide-moat-rated FactSet (FDS) finished its third fiscal quarter with no real surprises. The company generated sales of $339.9 million, representing year-over-year growth of 8.9%. Adjusting for acquisitions, organic revenue increased 5.7%. This quarter’s organic growth is in line with our view for sales growth for the next two years. Without acquisitions, we believe FactSet will only be able to achieve growth of 5%-5.5% over the next two fiscal years. As of the end of this quarter, FactSet’s acquisition, Bisam, has contributed a little less than 11.5 months worth of sales. Given organic growth is not improving, we are skeptical of management’s ability to extract value from Bisam. Though FactSet could very well finish the year on a high note, we continue to believe FactSet will find it difficult to accelerate organic revenue beyond a mid-single-digit growth rate. After making a few near-term adjustments, we are increasing our fair value estimate to $149 per share from $147, which is mostly attributable to the time value of money. Given the stock is trading at more than a 30% premium to our fair value estimate, we believe the stock is significantly overvalued and that the share price doesn’t reflect the margin pressures FactSet is facing.
Last quarter, we restated our belief that the company would struggle to grow GAAP margins in the near term. This quarter gave us no reason to change our mind. Specifically, the company mentioned ongoing restructuring initiatives and higher data costs. We expect increasing data costs will be a recurring theme for the foreseeable future and it’s not apparent to us that FactSet and its main competitors, Bloomberg and Thomson Reuters, have the ability to pass through 100% of these incremental costs. Nevertheless, FactSet reiterated its intention to increase operating margins by 100 basis points annually, which may be achievable in the short run, but we believe will prove challenging over the long term.
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Colin Plunkett does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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