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Tickers in this Article: FDS, TRI, MXB, MORN, TSCM
FactSet (NYSE:FDS) specializes in providing financial systems and services to firms and individuals operating in the investment industry. The firm has developed a loyal following among its clients and continues to sign new clients. Profitability is also stellar, but the current stock valuation is lofty.



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Third-Quarter Sales and Profit Trends


Revenues increased a respectable 3.8% to $160.3 million. U.S. revenue grew 3% to account for 67.8% while international improved a stronger 5% to account for the rest of the total top line. FactSet's projected revenue for the coming twelve months, which it defines as annual subscription value or ASV, increased 5% or $12.3 million to reach $646 million. This indicates that new sale activity is tracking ahead of current quarterly trends. Buy-side clients account for 82% of ASV, with the rest from sell-side firms. The company ended the quarter with 40,400 users.



Profitability improved with operating income growing 4.5% to $55.7 billion, or an impressive 34.7% of sales, as the company was able to uphold impressive operating margins. Lower other income items and a higher tax rate lowered net income growth to a negligible 0.3% to $38.7 million, but share buybacks upped earnings per share growth slightly to 2.5%, or 81 cents per diluted share. This beat analyst projections by a penny.



Lucrative Business Model


Providing financial software and information is also incredibly lucrative, as evidenced by solid net margins and far exceeding the single-digit net margins of archrival Thomson Reuters (NYSE:TRI) and the low double-digit margins of MSCI Inc. (NYSE:MXB). Morningstar (Nasdaq:MORN) and TheStreet.com (Nasdaq:TSCM) target more individual investors, with the first sporting a mid-teens net margin to come close to matching FactSet. TheStreet.com frequently reports net losses as it has yet to build sufficient scale to cover its product costs.



Guidance


FactSet expects fourth-quarter earnings between 78 cents and 80 cents. Analysts currently project full-year sales growth of 2.2% to $635 million, or very close to ASV. Earnings should exceed $3 per share for 2010.



The Bottom Line


FactSet's business continues to show no ill effects from the credit crisis and subsequent elimination of many current and prospective financial services clients. Its 89% retention rate speaks to the fact that clients consider the firm's systems an integral part of their research process and are unlikely to drop it during a down period in assets under management and corporate finance activity.



Unfortunately, this is an example of a great company with an unappealing share price valuation. FactSet currently trades at a forward P/E multiple of close to 24. So despite the impressive profitability, cash flow generation and overall growth, this is already reflected in the stock. (For an interactive look at equity research, see The Changing Role Of Equity Research.)



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