|Street's Mood Swings Aren't A Downer To Supplier Of Research Data|
Investor's Business Daily
Friday May 12, 7:00 pm ET
It's not like FactSet Research Systems needs a bustling Wall Street to succeed.
After all, the provider of financial data to investment firms has grown annual sales and earnings in double digits throughout the 2000s -- even when the stock market flopped.
"That's remarkable, given the head-count reductions on Wall Street during that time," said Neil Godsey, analyst at Freedman, Billings, Ramsey & Co.
Still, it doesn't hurt that current markets are operating at multiyear highs, or that the Dow Jones industrials are near an all-time high.
FactSet (NYSE:FDS - News) provides data and news to money managers and other investment pros through its desktop terminals. The firm has nearly 1,700 clients. More than 27,000 users subscribe to its services.
Current trends are working in FactSet's favor. Money is flowing into mutual funds, and investment banking activity -- mergers and acquisitions, and initial and secondary stock offerings -- is booming.
The upshot? Those firms are hiring more people -- and spending more on research products like those offered by FactSet.
"That's definitely been a tail wind," Godsey said.
FactSet also has gotten a boost from an increase in overseas business. Foreign sales contributed 28% of FactSet's total revenue the past two quarters. That's up from 20% two years ago.
"They still view the international opportunity as unusually large," Godsey said. "I think you'll see the growth rate there exceed its growth rate in the U.S."
The ratio of foreign sales to domestic sales could reach 50-50 in the next few years, says Steve Biggs, analyst at Zacks Investment Research.
Some recent additions in Europe have made a big difference. FactSet just completed deals with the major foreign exchanges in the past year, so it can now offer its real-time news and quotes service overseas.
The company also has forged alliances with key content providers overseas, such as Reuters and Standard & Poor's.
In addition, FactSet started making some acquisitions two years ago after previously shying away from buyouts.
In September 2004, it bought a Paris company, JCF Group, which compiles brokerage firms' earnings estimates in Europe. FactSet also has acquired a pair of British outfits over the past eight months.
FactSet executives were not available to comment. In a recent conference call, Chief Executive Philip Hadley said his firm's product "(has) continued to become more global."
Biggs expects the buying to continue. He says FactSet wants to add content -- especially overseas, where its product offerings aren't as complete as they are in the U.S.
"A lot of that goes to being the one-stop provider for analysts and money managers," Biggs said.
FactSet should have little trouble doing more deals, Godsey says. He views the company as an attractive owner for small firms, thanks to its strong management team.
He also praises FactSet's ability to grow sales and earnings no matter what the market environment.
"The consistency of FactSet's growth story is remarkable," he said.
This year is no different. Sales during the fiscal second quarter ended in February rose 22% from the prior year to $93.7 million. Earnings gained 12% to 38 cents per share.
Analysts polled by First Call expect full-year profit to climb 11% to $1.54, then move up 16% to $1.78 in fiscal 2007.
Time Is On Their Side
One of FactSet's strengths is that its products are designed to help save clients time, Godsey says.
"That enables (FactSet) to grow even in a tough market," he said. "The scarcest resource their customers have is their time."
About 75% of FactSet's sales comes from money managers. The rest comes from brokerage firms, split evenly between research analysts and investment bankers.
FactSet's willingness to nurture clients also helps it in tough times. It builds strong relationships that foster loyalty when customers are cutting costs.
Half of the company's growth comes from its existing client base. It typically renews more than 95% of its clients each year.
"They're gaining market share within the accounts they already have," Biggs said.
FactSet still has plenty of room to grow. It serves only a small fraction of potential clients.
"I view us as a tiny, tiny player in a huge industry at this point," CEO Hadley said during the conference call. "The opportunity is so large that I don't even see the wall yet."
Still, his firm could hit a few bumps. A stock market slump and slower merger and acquisition activity would hurt its results, Godsey says. FactSet also battles larger rivals, including Bloomberg, Thomson, Reuters and Standard & Poor's.
"Those companies have tremendous resources," Godsey said. "They have a lot they can bring to bear on the market."
Another wild card is a move by the Securities and Exchange Commission to crack down on "soft dollars." These dollars let money managers get research from brokerage firms in return for bringing trades to the brokerages.
The SEC's new policy could throw a monkey wrench into FactSet's plans because it might crimp clients' budgets, Biggs says.
"It makes the environment tougher," he said.