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Tickers in this Article: FIC, MHP, MCO, EFX
The credit crunch has been a big drag on the markets lately and shares of Fair Isaac (NYSE:FIC), maker of credit scoring systems for insurers and lenders, have taken a beating in the process.

The company, famous for its FICO score, has taken a lot of flak for not helping to predict which borrowers would default. But, with demand for its important product not likely to disappear, and pressure from institutional investors to increase value, the stock is starting to look attractive again. (To learn more about credit reports, see How is my credit score calculated?)

Credit Score, What Is It Good For?
"Absolutely nothing" would be the wrong answer. There is plenty of need for measurement of credit worthiness. While Fair Isaac has been shunned into the corner with the other ratings services like Moody's (NYSE:MCO) and Standard & Poor's, owned by McGraw Hill (NYSE:MHP), the situations are clearly different.

The job of debt ratings from Moody's, S&P and Fitch is specifically to determine the likelihood of a debt issuer defaulting. Those companies clearly dropped the ball when it came to rating debt backed by assets from subprime mortgages, and only adjusted debt ratings after the writing was already on the wall. The FICO score was much less to blame for the subprime meltdown, although it did have its problems.

For one, there was a loophole that allowed people to artificially raise their credit score by becoming "authorized users" of credit cards. This led to manipulations by credit boosting agencies that charged people for the ability to become an authorized user of another persons credit history. Fair Isaac has announced that it is changing these policy loopholes, but I think these sorts of issues had little impact on the overall credit situation we face today.

In my opinion, the main culprits is this credit fiasco are the lenders. They knew the riskiness of most borrowers, but lent freely anyway and developed products to take advantage of the "easy" money in the economy. The fact is that credit scores are integral in America life, and the term almost exclusively refers to the FICO credit score. If anything, lenders will have to make wiser and more frequent use of this tool, as this "easy" money begins to dry up. (To learn about all the players in the meltdown, see Who Is To Blame For The Subprime Crisis?)

New Competition
After having near a monopoly on consumer credit ratings, Fair Isaac suffered when the mortgage crisis began, and it started to get blamed for some of the market wide credit problems. Out of this evolved VantageScore, which is a rival to FICO, developed by the big three consumer credit reporting companies: Equifax (NYSE:EFX) Experian, and TransUnion. (For more on these companies, see Grading The Credit Bureaus.)

This competition has caused considerable pressure on Fair Isaac; pressure on the FICO score is a problem. While the scoring solutions division only makes up about 20% of revenues, it is by far the company's highest margin business, accounting for $112.4 million, or about 75% of the company's $148.5 million in operating income. If competition hits this division hard, it hits the whole company's bottom line.

Get In At The Bottom
Over the last few months the Fair Isaac shares have been on a rollercoaster ride bouncing up and down from around $40 to below $34. In my view, the sharp spikes in the shares over that time have been spurred by impressive earnings releases, and the dips attributed to competition and credit market concerns.

The competition will sting FICO, but the company has been performing quite well as of late, and I think the FICO score will hold its ground. One of the effects from the subprime fallout will be increased need for credit analysis of borrowers and Fair Isaac is positioned well to take advantage.

Recently, news came accross the wire that Fair Isaac is making some additions to its board after being pressured by Sandell Asset Management, a private equity firm that owns about 5% of the company. Sandell wants the firm to increase shareholder value, and I think the fact that management is being receptive to Sandell's advancement is a big plus for the stock moving forward. (For related reading, check out The Pros And Cons Of Institutional Ownership.)

Priced at about 16 times forward earnings estimates, I wouldn't call the shares very cheap, but I do think there is a good amount of upside in the stock.


The Bottom Line
Fair Isaac has had pressure lately from competition and the credit crunch blame game. I think that demand for the company's credit analysis will only increase as a result of the recent mortgage market turmoil. The recent results have been impressive, and I think the shares have a lot of upside after the recent plunge.

For more on the FICO score, see Consumer Credit Report: What's On It and The Importance Of Your Credit Score.)

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