For much of its history as a public company, FactSet (NYSE:FDS) shares have frustrated the value and GARP crowds. Now the shares look more reasonably valued, but the cause is yet another reason for concern. With sluggish employment trends in the financial sector and worries about competition from the likes of Bloomberg, McGraw Hill Financial's (NYSE:MHFI) S&P Capital IQ, now growth appears to be an issue for the company. While the company is likely to do better over the long term, investors considering these shares today need to be prepared for a little more volatility than with the average equity.Fiscal Third Quarter Results Look Pretty OrdinaryAlthough FactSet didn't miss this time out, there weren't any particular signs of re-acceleration in the business, and management confirmed that market conditions remain pretty challenging.Revenue rose about 6% as reported, or close to 5% on an organic basis. While the user count was basically flat on a sequential basis, the annual subscription value (ASV) increased almost 7% from the year-ago level, while remaining flat on a sequential basis. Even with the revenue growth, FactSet is finding it difficult to grow its margins. Gross margin fell almost two points form the year-ago and about 20bp sequentially. Operating income was up about 5% from last year (and down slightly on a sequential basis), with operating margin down relative to both periods.SEE: Analyzing Operating MarginsCompetition Isn't Getting Any EasierAlthough providing data and analytics services to the financial industry is a pretty lucrative proposition (the company's operating margin is above 33%, as is the trailing return on capital), it's an intensely competitive business. To that end, neither Bloomberg nor S&P Capital IQ are easing off their efforts to build their businesses. Bloomberg in particular seems focused on adding functionality and growing the data sets available in its fixed income platform. While Bloomberg is more expensive than FactSet in this market, the greater functionality of Bloomberg makes it more challenging for FactSet to get users to switch.Thomson Reuters (NYSE: TRI) is another interesting case from a competitive standpoint. Although FactSet has been doing pretty well against TRI on balance, the introduction of the new Eikon platform for investment management could generate some interest. Likewise, I continue to believe that Morningstar (Nasdaq: MORN) may be an underrated emerging competitor in the field; it's history is much more retail-oriented, but it looks like the company is bulking up its professional offerings and increasingly targeting the professional market(s).FactSet Needs Better Sector Employment, And That's Not Coming SoonCompetitive share gain clearly matters in this industry, but so too does the absolute level of hiring and employment in the financial services industry. Unfortunately, I see little reason to expect a big near-term improvement. Almost every bank with a trading, investment banking, or asset management operation, ranging from Bank of America (NYSE:BAC) to U.S. Bancorp (NYSE:USB) is talking about trying to reduce labor costs and staffing levels.Moreover, it's not as though the buy-side is able to gobble up all of this newly surplus workers. While it's too simplistic to say that near-record levels for the stock market and strong trading activity ought to be good for the banks, the reality is that it's not stimulating any particular hiring wave in the sector.The Bottom LineFactSet has generally been overvalued for so long that it's tempting to pounce on the shares now that they're more reasonably valued. Still, I suspect that the markets are going to react pretty dramatically to the quarterly updates regarding subscriber numbers, ASVs, and so on – meaning that these shares could bounce around quite a bit around quarterly earnings. Across the longer term, though, I do believe this company can grow revenue at roughly 8% rate, with broadly similar growth in free cash flow.That level of growth suggests a fair value for FactSet shares of about $98.50. More or less in line with the current price, FactSet doesn't seem like much of a bargain apart from the fact it has often historically traded at an even higher premium. A decent enough stock for the long haul, I can't really summon up much enthusiasm for the shares as a buy or sell at today's price.

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Personal Finance

    How Tech Can Help with 3 Behavioral Finance Biases

    Even if you’re a finance or statistics expert, you’re not immune to common decision-making mistakes that can negatively impact your finances.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Investing

    What's Better Facebook Moments or Google Photos ?

    Facebook and Google have both released new cloud-based photo sharing services. How good are they?
  6. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  7. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  8. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  9. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  10. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center