FactSet (NYSE:FDS) sells software and data that helps financial professionals research financial markets and analyze individual securities. Its products are proving indispensable to existing customers, and the firm's recent second quarter results indicated that it continues to have no problem signing up new ones. The only thing to not like about the investment story is the valuation.

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Second Quarter Recap
Revenues increased 12.2% to $199.4 million. United States revenue also advanced 12.2% and reached $136.4 million, or roughly 68% of the total top line. International accounted for the remaining 32% and also improved 12.2%. The total client count increased to 2,324 with 81% from the buy side and related firms including Federated Investors (NYSE:FII) and Legg Mason (NYSE:LM). The remaining 19% stemmed from the sell side and firms such as Jefferies (NYSE:JEF) and Citigroup (NYSE:C). FactSet boasted a client retention rate of 95%.

Total expenses rose 10.6% to lag sales growth and help push operating income up 16.1% to $67.6 million. Higher income tax expenses resulted in net income growth of only 3.3%. Earnings came in at $46.7 million, or $1.02 per diluted share. FactSet ended the quarter with no long-term debt and more than $200 million in cash, or approximately $4.35 per diluted share.

Outlook and Valuation
FactSet projects third quarter revenue growth between 9 and 11%, and earnings in a range of $1.14 and $1.16 for year-over-year growth between 12 and 14%. Analysts currently project nearly 12% full year sales growth, total sales of $811 million and earnings per share of $4.12.

Given the current projections for the full year, FactSet trades at a forward P/E of 21.

The Bottom Line
FactSet reported another impressive quarter of growth and has grown in the double digits for more than a decade now. The only problem with investing in the stock currently is its lofty valuation. With a hiccup in the aggressive earnings growth the market is expecting, the stock could get killed. As long as any weakness isn't attributed to a fundamental deterioration in FactSet's operations, this would represent a good entry point.

From an investment standpoint, at the current stock price level, there appears to be a significant amount of downside risk. FactSet has proven that clients find its software and financial market data just as indispensable as their Bloomberg terminals or similar product offerings from Thomson Reuters (NYSE:TRI), but this strong competitive position is fully reflected in the valuation.

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article

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