Tickers in this Article: FDS, MORN, MHP, TRI, BAC
Bank of America's (NYSE:BAC) plans to cut its workforce by about 10% will hurt financial data providers. Revenue streams and stock prices for information delivery companies like FactSet Research Systems (NYSE:FDS) should compress while the group tracks the financial sector.

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Not Under the Spotlight
This lightly followed segment of the market is responsible for delivering the information investors need to make decisions. Financial data companies operate in the information delivery and services industry. They collect, warehouse and analyze massive amounts of data on companies, stocks, mutual funds and other investment vehicles. Big players in the industry include companies like FactSet, Bloomberg and Morningstar (Nasdaq:MORN). Financial information delivery service companies generate income primarily from subscription accounts for investment research and data as well as other services. The McGraw-Hill Companies (NYSE:MHP), for instance, provides both financial data and educational services. McGraw-Hill recently announced it will split into a markets data company and an education business.

Even though information delivery companies play a crucial role in pricing securities and other assets, they receive dramatically less attention from retail investors and analysts compared with more recognized financial institutions. Trading volumes for these companies pale in comparison to banks and other financial institutions. The irony of this industry is that, despite businesses like Morningstar and McGraw-Hill executing investment research, few analysts cover the sector. The lack of coverage contributes to the relative light volume and lagging trade action. (From coins to credit, find out how the earliest money management system started. For more, see The Evolution Of Banking.)

Trading Data
Even though financial data companies are highly leveraged to big financial institutions who are the primary users of their services, they typically trade in a slightly more defensive manner. From the market top in October 2007 to the market bottom in March 2009, the losses suffered by data providers were substantially less than institutional users. During the period, Thomson Reuters (NYSE:TRI) fell close to 49%. That compares to Bank of America losing over 90%. FactSet and Morningstar, down roughly 60% over the same time frame, mirrored the performance of Goldman Sachs, a better-positioned financial company. Similar results are being reflected during the September swoon. The losses from the financial data delivery sector have actually more closely matched that of the S&P 500 during that time period.

The Bottom Line
Data providers will follow in the volatile footsteps of the financial services industry. While investors should expect some revenue hit from the problems of the banking segment, the moves should be muted compared with bigger financial institutions.

Financial data providers may be impacted to different degrees as companies like Bank of America cut back and other institutions implement hiring freezes. FactSet, for example, is exposed to heightened institutional risk as the company does not service individual investors. FactSet depends on institutional clients who have a lot of employees that use the company's software and services. On the other hand, Thomson Reuters will benefit from an outstanding 4.4% dividend if investors turn to high yielders amid market turmoil. If market conditions settle, Morningstar is an attractive option. Morningstar is one of the best sources of data and research in the industry, and growth is achievable through capture of some of the credit rating market that S&P and Moody's dominate. (For related reading, see The Rise Of The Modern Investment Bank.)

However, there appears to be more downside risk derived from the European banking crisis. Exposure to bad debt will continue to drag on the market, and the providers of financial data may collect some of those losses.

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