It probably won’t surprise you that researching stocks is one of my favorite things to do. I absolutely love rolling up my sleeves and digging into a company’s fundamentals, trading volume, cash flow, and on and on. This is not easy work, but today’s technology makes it a whole lot easier than it used to be — especially with the vast amount of data we now have at our fingertips.
I confess I still like to print things out and pore through them with a fine-tooth comb (like with a company’s 10-K), but computers and the Internet help save a ton of time while also minimizing the chances for error.
One company that has successfully capitalized on this big data trend is FactSet Research Systems Inc. (NYSE:FDS). I like FactSet Research Systems’s innovative tools, and I also like FDS stock’s potential.
FDS is off to a strong start this year, up 11.5% as we near the end of the first quarter. FactSet Research Systems has rallied nicely over the last week or so, including a nice bump earlier this week after a solid earnings report, and FDS has room to keep moving higher. We’ll dive into earnings more in a moment, but first let me tell you a little bit about why I recommended FactSet Research Systems in my GameChangers service to begin with.
FactSet really was Big Data before Big Data was cool. Two partners founded FDS in 1978 at a small investment banking firm, and by 1990, FDS had its first product running on a Windows platform. By 1995, it had grown to 400 customers (84 of which were leading U.S. investment managers), and one year later, FDS rang the NYSE bell and started trading publicly.
FactSet Research Systems has come a long way since then and now offers a wide range of news and analytics capabilities that go beyond mere number crunching. FDS products include tools that can manipulate and present data to a user’s preferences, analytics that measure a portfolio’s risks and exposure to industry groups and geographical locations, live quotes and newsfeeds that can be used for alerts, event transcripts and earnings estimates for current holdings, as well as analytics for fixed income investing.
Each service is sold on a subscription basis with an average plan price of roughly $1,450 a month. Management invests heavily in customer service and has an outstanding 97% satisfaction rate — in fact, FDS had a 93% client renewal rate with a record number of buy-side client additions in its most recent fiscal second-quarter.
On top of all of that, FDS has a very admirable track record, with 34 consecutive years of revenue growth and 19 straight years of earnings growth as a public company. Operating margins have been greater than 31% each year since 2002. FactSet’s consistency is remarkable, and the long-term growth is also incredible considering the fact that data analytics is not a fast-growing industry — it increases at about 2% per year, largely from price hikes.
FDS Had Another Solid Quarter
FactSet’s solid performance continued through its most recent quarter, and FDS stock rallied 3% on Tuesday (Mar. 17) after results were released. Revenue grew an impressive 9.2% driven by industry growth, newly-captured market share, that great client renewal rate we talked about, as well as gains in fixed income, credit and wealth management.
Earnings-per-share grew even more, rising 14% to $1.39 as margins got boosts from foreign currency weakness and buyback programs that caused the share count to decrease nearly 2% from last year.
Guidance for the current quarter was also solid, with revenues expected to grow 9% and earnings to increase 12.8%. Operating margins should be around 33% – 34%, which is a 20-basis-point increase at the midpoint.
There were also some encouraging takeaways from the FactSet conference call. As I mentioned earlier, data analytics is not a fast-growing industry, and I believe there are some concerns that the industry may in fact be shrinking as more investors turn toward passive forms of management (like index funds). So, I was pleased to hear from FactSet management that FDS’ clients are optimistic about their staffing levels in the long term.
Another important topic discussed on the call was the status of management changes. Current Chairman and CEO Phil Hadley will step down from the CEO role on July 1, but he will stay on as Chairman for a year in order to help with potential acquisitions. After that, he will reassess his role with FactSet. Company President Philip Snow will take over as CEO.
Although this move was planned, it has still raised some eyebrows as Hadley is just 52 years old. I believe many analysts were wondering whether he was getting ready to take the top spot at a competitor, but Hadley has said that he is very loyal to FactSet. So, I do not expect a potential move by him to be an issue in the near term.
In this low-interest-rate environment, FactSet has exactly what investors are looking for: steady growth. I also like that annual subscriptions worth more than $1 billion (up 8.5% organically from last year) provide a solid revenue stream that gives us good visibility into growth over the next 12 months.