The Market Is Still Overvaluing FactSet
Despite slowing growth, margin contraction, and headwinds from weaker buy-side customer demand, the market continues to award FactSet with a higher multiple.
Wide-moat FactSet Research Systems, (FDS) modestly outperformed our expectations for the company’s fiscal fourth quarter. FactSet finished the fourth quarter with $347.1 million in organic revenue, representing year-over-year growth of 5.3%. The company has seen organic growth decelerate by 100 basis points over the last year. In addition, GAAP operating margins continue to contract. For fiscal 2017, GAAP operating margins were 27.1%, a 180-basis-point decline from 2017. This is the company’s worst margin performance going back at least 18 years. However, there are signs to be optimistic. During the quarter, the company won the right to provide Merrill Lynch advisors with market data. We estimate this deal will produce additional revenue somewhere in the neighborhood of $8 to $12 million annually and account for potentially 15% of FactSet’s fiscal 2019 growth. The company gave modestly better-than-expected guidance for 2019. As a result, we expect to increase our fair value estimate to $157 per share from $149. Nevertheless, we think the company is still significantly overvalued. Currently, the market values the company at nearly a 45% premium to our fair value estimate. In addition, the company trades at an EV/EBIT of 24.6 times. Our new fair value estimate would only translate into an EV/EBIT in the upper-teens.
Despite slowing growth, margin contraction, and headwinds from weaker buy-side customer demand, the market continues to award FactSet with a higher multiple. Not since the middle of 2001 has the company achieved such respect from the market. Owners of shares in FactSet will need to ignore the fact that in 2001 FactSet’s revenue grew by nearly 25% and diluted GAAP earnings per share grew by 28%. In comparison to this year, organic revenue expanded by 5.6% and diluted GAAP diluted earnings per share grew by only 4.1%.
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Colin Plunkett does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.