Judging by recent results at FactSet (NYSE:FDS), the financial services industry is as healthy as ever. However, FactSet's success is more a reflection of the appeal of its data platforms and research solutions. As a result, clients are remaining loyal despite other major struggles in their businesses. So, while FactSet's business is very appealing from an investment perspective, its share price currently leaves something to be desired.

IN PICTURES: 7 Forehead-Slapping Stock Blunders

Fourth Quarter Revenues
Fourth-quarter revenues eked out a 1.1% gain to $155.5 million as FactSet was able to grow annual subscription value (ASV), client and users in the face of an extremely challenging industry climate. The company defines ASV as forward-looking revenue over the coming 12 months, and ended the year at a healthy $619 million. 82% of this stemmed from the buy side and asset managers such as Waddell & Reed Financial (NYSE:WDR), with the balance from sell-side firms that perform M&A advisory work and equity research, and include firms such as Morgan Stanley (NYSE:MS) and Goldman Sachs (NYSE:GS).

Cost Control
Cost controls allowed FactSet to boost operating and net income 8% to $54 million and $36.3 million, respectively. Net margins weighed in at 23.3%, demonstrating just how lucrative FactSet's business is. Share buybacks bumped earnings up 10% to 74 cents per diluted common share.

Full-Year Results and Expectations
Full year results were slightly stronger and reflect the fact that underlying client trends weakened as FactSet's fiscal year progressed. Revenue ended up increasing 18.8% to $622 million while earnings advanced 18.8% to $2.97 per diluted share. Free cash flow also advanced an impressive 71% to $184 million, or approximately $3.77 per diluted share, as FactSet's business does not require high levels of capital to run and maintain the business. The company also ended the year without any long-term debt and $216 million in cash.

Analysts expect revenues for the coming year to come in around current ASV, or $633.4 million and earnings of $2.95 per share. At the current share price, this is a lofty forward P/E multiple of 24. The trailing price-to-free-cash-flow multiple is slightly more reasonable at just under 19, but all multiples have elevated significantly due to FactSet's stellar stock run of the past few months - back in April the shares hovered below $50 but now exceed $70.

Bottom Line
In other words, this is an example of a solid company with unappealing stock that is discounting many more years of double-digit sales and cash flow growth. Archrival Thomson Reuters (NYSE:TRI) is looking more appealing at under 19 times forward earnings estimates, but is nearly 10 times FactSet's size, and will struggle to grow as rapidly as its more nimble peer. (For more, see What Are A Stock's "Fundamentals"?)

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Tickers in this Article: FDS, MS, GS, WDR, TRI

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