Factset Research Systems (NYSE:FDS) may be one of the most under-loved U.S. mid-cap stocks—and this could be a good thing. The maker of analytical software for investment professionals has some of the best growth metrics in the information services space, although you wouldn't know it by the Street's opinions of its stock.
Covered by 14 analysts, Factset does not presently have a single buy rating. Five analysts call it a sell while the remainder have hold ratings. The highest price target of $315 is 6% below the current share price.
Is the consensus opinion consistent with the company's fundamentals, or is Factset a contrarian buy opportunity? As the company gets set to report fourth-quarter performance pre-market on September 24th, better than expected results could really catch the market off guard.
Why is the Street Cautious on Factset?
Last quarter, Factset fell short on revenues but handily topped the consensus earnings estimate. Despite the 17% bottom line beat, the market grew concerned about the company's heightened level of investments,a trend that is expected to persist.
Factset is investing in its next-generation cloud-based platform to evolve with where financial technology is heading. Amid a digital transformation in the industry, Factset is pouring significant dollars into flexible, mobile technology and producing differentiated, personalized client content.
These are indeed big-time investments. But sometimes you have to spend money to make money. The market appears shortsighted in this regard.
Factset has also been active on the acquisition front, which has been a major part of its growth. This not only comes with the cost of buying the new companies, but with integration expenses and risks. In connection with the acquisitions, the debt load has increased beyond the cash balance to $574 million. With so many moving parts now under its wing, Factset has become somewhat of a 'prove it' story.
Complicating matters, competition has heated up in the financial market data and services space. A bevy of fintech startups threaten to change the way investment firms do research and manage their databases. This has placed competitive and pricing pressures on Factset.
However, somewhat lost in the recent report was a string of positive developments in the cost column. With the offices of most customers and prospects closed due to the pandemic, travel and entertainment expenses were down. This is a trend that will likely continue as the financial services sector shifts towards more virtually based client and vendor meetings. And with many Factset employees working remotely, productivity improved. Factset's staff addition strategy geared towards the lower-cost parts of the world also bodes well for expenses.
What Should We Look for When Factset Reports?
For Q4 analysts are looking for EPS of $2.54 which would represent a 3% year-over-year earnings decline. Given a partial return to business normalcy and the improvements on the expense side of the ledger, its conceivable that Factset ekes out flat earnings if not low single-digit growth. This would stretch its earnings-beat streak to seven quarters. And depending on what the market chooses to focus on, it could also spark a rally in the stock and upward estimate revisions for fiscal 2021.
Factset's international growth metrics will also be under the microscope. International revenues accounted for about 38% of total revenue last year and are growing faster than the domestic business.
Results in the Asia Pacific region will be watched particularly closely. Although the APAC region comprises around 10% of revenue, it is the company's fastest-growing region. Factset's Shanghai office caters to the region's swelling ranks of investment managers and will be a key component of future growth.
Should Investors Buy Factset?
Despite the subdued analyst sentiment toward Factset, the company has a lot in its favor. For one, it’s still very much a leading provider of data and analytic solutions for the global investment community. Its high-end offerings command premium subscription rates and allow the company to increase prices.
Prior to this year, when virtually all businesses have slowed due to the economic environment, Factset's earnings growth was accelerating from 14.2% in 2017 to 16.7% in 2018 to 17.2% in 2019.
In 2020, annual subscription value (ASV), a key measure of Factset's recurring revenue stream, has been on the rise due to broad-based growth in the Wealth, Research, and International segments.
The underlying trends in client count and user count are also favorable. The number of financial services companies that spend at least $10,000 on annual Factset subscription services was up 5% to over 5,700 last quarter.
Client retention rates are hovering around 90% even though it operates in an increasingly competitive space marked by a continual wave of new products.
Given Factset's extensive global network and opportunities to grow both geographically and from new product launches, it is well positioned to benefit from growth in the investment analytics market.
Once the investments in its platforms begin to bear fruit, analysts may start to play catch-up. So, any near-term weakness in Factset stock related to overall market conditions or the company's ramp in investments may be a good entry point for investors.
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