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FactSet's Ambitious Growth Expectations
Investment research platform provider FactSet (NYSE:FDS) reported another quarter of double-digit sales and profit growth, but total growth trends have been moderating in recent years. The firm's operating performance has been enviable in a tough market for financial services, but investors expect continued rapid growth at the current share price valuation.
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Third Quarter Recap
Revenues advanced 15% to $183.6 million. U.S. based revenue made up just less than 70% of the total and improved 16%. Non-U.S. revenue accounted for the remainder of total sales and increased 12%. FactSet ended the quarter with 45,600 total users for quarter-over-quarter growth of about 1.8% and total clients of 2,187. Just over 80% of clients are from the buy-side that includes firms such as Federated Investors, Inc. (NYSE:FII) and Janus Capital Group, Inc. (NYSE:JNS). The rest consisted of sell-side clients and firms including Goldman Sachs (NYSE:GS) and Raymond James Financial Inc. (NYSE:RJF).
Operating income grew 11% to $61.8 million for a very healthy operating margin of almost 34%. Net income increased 12% to $43.3 million and share buybacks helped earnings per share increase 13.6% to 92 cents per diluted share. This matched analyst projections.
Outlook
For the fourth quarter, FactSet management currently anticipates revenues between $187 million and $191 million and earnings in a range of 93 cents and 95 cents per share. Analysts currently project full-year sales growth of nearly 13% and total sales just north of $723 million. The consensus earnings projection is $3.66 per share, or year-over-year growth of approximately 14%. (For related reading on the reliability of guidance, see Can Earnings Guidance Accurately Predict The Future?)
Bottom Line
FactSet's stock fell a bit as the market was rumored to be unhappy with the low end of the fourth-quarter profit range, but still trades at a lofty forward P/E of 27. This high valuation has been justified by past performance that has seen sales grow close to 17% and earnings grow more than 20% on average annually over the past decade. However, growth trends have moderated in recent year and are averaging in the low double digits.
At the current valuation, FactSet will need at least another decade of double-digit growth to justify where the stock is currently trading. This could happen, but there isn't much downside built into the stock should growth fall short of these levels. As such, investors with a long-term perspective may want to wait for a lower price and more favorable risk/reward tradeoff.
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Third Quarter Recap
Revenues advanced 15% to $183.6 million. U.S. based revenue made up just less than 70% of the total and improved 16%. Non-U.S. revenue accounted for the remainder of total sales and increased 12%. FactSet ended the quarter with 45,600 total users for quarter-over-quarter growth of about 1.8% and total clients of 2,187. Just over 80% of clients are from the buy-side that includes firms such as Federated Investors, Inc. (NYSE:FII) and Janus Capital Group, Inc. (NYSE:JNS). The rest consisted of sell-side clients and firms including Goldman Sachs (NYSE:GS) and Raymond James Financial Inc. (NYSE:RJF).
Operating income grew 11% to $61.8 million for a very healthy operating margin of almost 34%. Net income increased 12% to $43.3 million and share buybacks helped earnings per share increase 13.6% to 92 cents per diluted share. This matched analyst projections.
For the fourth quarter, FactSet management currently anticipates revenues between $187 million and $191 million and earnings in a range of 93 cents and 95 cents per share. Analysts currently project full-year sales growth of nearly 13% and total sales just north of $723 million. The consensus earnings projection is $3.66 per share, or year-over-year growth of approximately 14%. (For related reading on the reliability of guidance, see Can Earnings Guidance Accurately Predict The Future?)
Bottom Line
FactSet's stock fell a bit as the market was rumored to be unhappy with the low end of the fourth-quarter profit range, but still trades at a lofty forward P/E of 27. This high valuation has been justified by past performance that has seen sales grow close to 17% and earnings grow more than 20% on average annually over the past decade. However, growth trends have moderated in recent year and are averaging in the low double digits.
At the current valuation, FactSet will need at least another decade of double-digit growth to justify where the stock is currently trading. This could happen, but there isn't much downside built into the stock should growth fall short of these levels. As such, investors with a long-term perspective may want to wait for a lower price and more favorable risk/reward tradeoff.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Ryan C. Fuhrmann
Ryan C. Fuhrmann, CFA, has a background in portfolio management, overseeing assets for high-net-worth individuals and covering a broad array of industries from a generalist perspective. An active student of investing, he focuses on communicating his ideas as an investment writer and learning from the financial community. Ryan is also actively involved with the CFA Institute. Feel free to visit his website at www.rationalanalyst.com.
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