2023-12-17 10:38:03 ET
Summary
- FactSet offers crucial financial data access to investors and operates in a competitive industry alongside MSCI and S&P Global.
- In Q4 2023, FactSet reported solid revenue growth and expects continued growth in fiscal 2024.
- FactSet is strategically investing in Artificial Intelligence to enhance its offerings and stay ahead in the financial data industry.
Introduction
In the modern era, the significance of financial data cannot be overstated.
As we navigate the computer age, top-tier investors, hedge funds, and pension plans rely heavily on financial data to guide their investment strategies. In a marketplace where data-driven decision-making is the norm, not leveraging this valuable asset can disadvantage you substantially.
Imagine entering a weightlifting competition without the "enhancements" your competitors might be using; the scenario is analogous to competing in the financial world without data insights.
FactSet ( FDS ) stands out as a key player in this realm, offering crucial data access to a diverse range of investors. I like to compare their role in the financial sector to that of an arms dealer in a highly competitive battle for a competitive edge in the market.
This approach has proven immensely successful for FactSet, as evidenced by its rapid growth and substantial returns for shareholders over the past decade. In fact, an investment in FactSet over the S&P 500 a decade ago would have resulted in over 100% of outperformance over the index!
Interested to learn more? In this article, I will delve into FactSet 's business model and the broader industry. I'll provide a detailed analysis of their latest earnings report and offer insights into the potential future trajectory of their business and stock price.
Brief Company and Industry Overview
To kick things off, let's take a quick look at FactSet and the industry it operates in. First, as noted earlier, FactSet is known for its extensive offering of digital products and services to serve its institutional clients in the investment world, such as asset managers and investment banks.
To simplify it, the core of FactSet's business model revolves around incorporating financial data with analytical tools. It may sound simple on the face of it, but to effectively operate in the industry, companies must invest in heavily specialized tools and resources for their clients. These tools can be highly specialized, are often complex to develop and are sold at a high price.
Something else important for investors to understand is that competition can be fierce in the financial data industry, given just how lucrative its solutions can be.
FactSet stands alongside industry stalwarts such as MSCI ( MSCI ) and S&P Global ( SPGI ). They, too, offer a wide array of financial data and analytical services, targeting a client base similar to FactSet's. And while there is some overlap between these businesses, their offerings are by no means identical and, in many cases, are heavily specialized for a specific customer base.
This sector is integral to the workings of the global financial markets, as it supplies vital insights and data to an extensive range of financial experts and institutions.
Fourth Quarter Fiscal 2023 Performance
Revenue and EPS Trends + 2024 Forecast
Looking at the most recently reported earnings. For Q4 2023, FactSet brought in revenues of $535.8 million, a solid increase of 7.3% compared to the previous year in light of the challenging macro environment. This was supported by its Organic ASV plus professional services growth, which came in at 7.1% year-over-year.
This quarter's revenue growth led the company to reach a new all-time high in revenues for the full year, a familiar sight for long-term investors. FactSet is one of those rare companies that has consistently grown its top line in both good times and bad alike; decade after decade, FactSet just... grows.
Turning our attention to EPS, we begin to see a similar story unfold. This last quarter, FactSet's Non-GAAP EPS stood at $2.93; though this missed investor expectations, I don't believe this should be a large source of worry for long-term investors based on the guidance looking forward and its long-term earnings growth (as seen above).
Looking ahead, for fiscal 2024, FactSet appears to expect more of the same as they projected ASV plus professional services growth of 6% - 8%, with an anticipated GAAP revenue growth of 6% - 7% and an adjusted EPS growth of 6.5% - 10%.
What's Next: AI as a Long-Term Growth Driver
FactSet is strategically positioning itself to leapfrog the competition by heavily investing in Artificial Intelligence, particularly Generative AI, to enhance and supplement its offerings.
In its earnings call the company's CEO, Phil Snow, emphasized the transformative role GenAI is set to play in client services and operations. This includes the development of a conversational user interface for bankers and an advanced portfolio manager bot for asset managers, which are prime examples of how GenAI can streamline and enrich user interactions with FactSet's platform.
Additionally, the integration of GenAI in creating code within FactSet's programmatic environment is poised to make complex programming more accessible to a broader user base, reducing the reliance on deep technical skills like Python.
Furthermore, FactSet's unique content refinery, a blend of proprietary and third-party data, is expected to gain a significant competitive advantage by integrating GenAI. This advancement will empower more efficient and robust workflows, enhancing the value of the data provided to clients.
From an operational standpoint, Phil Snow highlighted the potential for substantial cost savings and efficiency improvements, with AI-driven initiatives already underway to boost the productivity of FactSet's technology teams.
Looking ahead, the company is not just looking to enhance its current offerings but is also exploring new AI-driven solutions. These initiatives mark a pivotal step in FactSet's journey to stay ahead in the competitive financial data industry and redefine the standards and capabilities of financial analytics and data services.
Balance Sheet
Turning our attention back to the financials, let's examine FactSet's balance sheet. Despite a recent dip in interest rates following recent comments from Fed Chair Jerome Powell, we still find ourselves in a world of higher interest rates. Companies that overly rely on debt have found themselves in store for a rude awakening as financing costs have begun to skyrocket.
Historically, the company has had very little debt, though this has begun to change over the past couple of years as its long-term liabilities have increased to $1.86B, up from around $800M just a couple of years ago. As a result of that increase and higher interest rates, the cost of financing their debt load has more than doubled (up to $53M per annum).
Helping to mitigate these concerns is the relatively large amount of cash the company has on hand, sitting at $425. Given that cash cushion, I am not overly concerned about its debt management strategy.
Returns on Invested Capital
Compared to its stellar track record of earnings and revenue growth, one sore spot is its returns on capital, which, though still strong at 14%, are markedly below the levels the company has previously delivered.
As companies grow, it is natural that returns on capital begin to slow at a certain point. Still, in the case of FactSet, the deceleration has been shockingly rapid and raises concerns about whether they are starting to run out of accretive investment opportunities. Investors would be wise to closely monitor this trend.
Dividend Growth
While I no longer strictly consider myself a dividend investor, I do still pay close attention to the dividend policy of the companies I choose to invest in. While some would argue dividends are irrelevant, I would disagree, as I believe they are a strong indication of alignment between management and shareholders.
To me, a dividend payment signals an acknowledgment from management that they understand who the company's true owners are; in other words, they know who the money truly belongs to. As such, companies that prioritize paying dividends will be distracted less by endeavors such as empire-building.
In the case of FactSet , this company passes my dividend evaluation with flying colors; sure, at 0.84%, the yield is relatively low, but the company is of a rare breed, having increased its dividend consistently for more than two decades.
When a company is growing as fast as FactSet is, I prefer to leave them as much capital to invest as possible.
Valuation vs Peers and Growth Prospects
Compared to peers S&P Global (35X) and MSCI (41X), FactSet has the lowest forward PE ratio at 28.41 and the lowest Price to Earnings Growth ratio at just 0.9X compared to 1.5X and 1.8X for S&P and MSCI, respectively.
Unsurprisingly, MSCI, with its best-in-class returns on capital and high expected growth rate, trades at the greatest valuation multiple. Though perhaps more interestingly, S&P trades at a significant premium compared to FactSet despite much worse returns on capital.
Conclusion
While there is some concern around FactSet's decelerating returns on capital, its proven track record and strong position within the industry merit a positive outlook, at least in the near term. In comparison to peers like MSCI and S&P Global, FactSet stands out for its more attractive valuation, trading at a significantly lower multiple of 28.4X, despite having business models that are quite similar.
There's potential for a notable increase in the stock price, especially if it surpasses the resistance level around the $470-480 range. While this price movement is speculative, FactSet's prospects as a consistent long-term performer seem promising.
Based on these considerations, I recommend FactSet as a Buy.
For further details see:
Factset: A High-Quality Compounder