Hello StockCentral,
I have chosen FDS as my Stock to Study. My investment club currently owns shares of the Co. and I have been watching it for the club. We have had 2 excellent studies by well known and well respected investors. I will go through the SSG process as they did but with a slightly different approach. I call it a “2nd opinion” of my SSG.
I use Stock Analyst (SA) program which uses the BI Stock Data Service for it’s raw data. The exact numbers may differ from Investors ToolKit (ITK) but hopefully the trends and judgments will be comparable. I have attached a Power Point to high light some of the judgments made through out the presentation.
FactSet Research Systems Inc. (FactSet) supplies financial intelligence to the global investment community. The Company’s wholly owned subsidiary is FactSet Data Systems, Inc. (FDS). FactSet applications support and make more workflows for buy and sell-side professionals. The applications provide users access to company analysis, multicompany comparisons, industry analysis, company screening, portfolio analysis, predictive risk measurements, alphatesting, portfolio optimization and simulation, real-time news and quotes and tools to value and analyze fixed income securities and portfolios. The Company combines more than 200 databases, including content regarding tens of thousands of companies and securities from major markets across the globe into a single online platform of information and analytics. FactSet is available via wireless, handled devices and is fully integrated with Microsoft Office applications. In Januaryry 2008, the Company acquired DealMaven, Inc.
In the companies latest quarterly report, it stated that 78% of it’s clients are Investment Managers (buy side professionals) and 22% Investment Bankers (sell side professionals). With the recent fall of Bear Sterns, (the 5th largest US Investment Bank) the stock of FDS attained a yearly low of $43.06, but has since gone up in price. The rise occurred after the Co. reported 2nd Qtr. Results and announced that Bear Sterns accounted of <1% of revenue for the Co. Revenue from US clients was 69% of the total revenue; non US clients was 31%.
The Co. has a quality rating of 10 from the Online Take Stock program (available at StockCentral). This becomes obvious when we look at the front page of the SSG. The sales and earnings lines are very nearly parallel. The lines are steady, predictable and strong; plus the Co. has no debt. This is everything we look for in a quality stock. It’s recent price of $52.88 is 32% above the yearly low, and 68% from the high. The stock’s 52 week low price occurred on 3-17-08. The Co. also has a 95% client retention rate.
Future sales and earnings growth is the first judgment we need to consider. Looking at the 3, 5, and 10 year annual growth rates from the Balance Sheet Report of SA, we see strong growth figures that are consistent as noted by an R^2 rating of 99. (ITK gives similar data in the Visual analysis graph.) Looking at the front page of the SSG, we see that the 10 year sales average was 20.5% per annum; if we eliminate years 1998 through 2001, giving us the latest 5 years of sales growth, we see the growth is 18.6%. The latest Qtr. Sales growth was 20.6%. Close inspection of the sales graph shows a slow down from 2001 to 2004.(See slide 1) This slowdown occurred during the last US economic recession, and took 3 years to recover. Sales growth during those years was about 14%. This is easily calculated using the financial calculator that comes with the programs. (See slide 2)
Looking at the online Take Stock numbers, we see predictable sales growth (with removal of outliers) of 18.5%.
Value Line predicts yearly sales growth of 16.5% as seen in the “Annual Sales” chart on the left side of the report. Looking at sales on the statistical array data on the VL report (11th line under the chart) we see a prediction of $925M in 3 to 5 years. If we start with sales of $501M from the most recent quarter and calculate the percentage growth in 3,4 and 5 years, we get percentage of growth of 22.7% in 3 years, 16.6% in 4 years and 13% in 5 years. (See slide 3)
The front page of the SSG showed slow growth after the recession in 2001. This slow down is also evident in the past revenues as seen in VL. From 2000 to 2001, sales increased from 134.2 to 176.7, an increase of 31%. 2001 to 2002 sales went from 176.6 to 205.6 an increase of 16%. 2002 to 2003 sales increased 8%; 2003 to 2004 sales increased 16%. 2004 to 2005 sales increased 24%. From these numbers we see that sales growth slowed significantly after the last recession, and that it took 4 years for growth to rebound. These numbers may alter your judgment if you believe a recession, or slowing economic growth, is near for the US (69% of sales). Otherwise these numbers can be treated as outliers.
One last piece of data to look at in VL is the future ROE (22%) and the future pay out ratio (15%). These numbers will be used when we calculate the “Implied Growth” for the Co.
One last source of data for predicting future sales growth is from the Co. management. I find 10K and 10Q reports to be helpful in assessing future growth. Although no Co. will predict growth for the next 3-5 years, these reports usually discuss growth prospects as well as potential barriers to future growth. (See slide 4 and 5)
As the slide on the Growth Choices shows, I believe from the research I have done that sales should be between 13% and 23%. Because I believe the US economy may be headed for a recession,or at least a significant slow down, I chose future sales growth of 14%-much like the rate of growth after the last US recession. This may be too conservative, especially if one plans to hold the stock greater than 3 years. (Remember after the last recession, the sales growth rebounded by the 4th year.) If you are buying for the long run, a sales growth of 16% to 19% over that period of time may be more accurate. This is a small Co. with greater growth potential. However, sales and Margins have been excellent and that usually invites competition. (See slide 6) Whatever sales growth you use, it is always good to check your future sales number against VL. If you differ from that figure, you may want to recheck your numbers, or ask someone else for their thoughts. (On my SSG I have sales of $964M in 5 years at 14% growth per year; VL has sales of $925M in 4 years at 16% growth.)
Next we need to look at earnings growth. Many BI investors use earnings growth rates that are the same as sales. I usually do the Preferred Procedure especially if there are changes in the Co. margins, taxes or number of shares outstanding. (These are often discussed in the 10Q under management discussion.) If I see the sales and earnings trend lines parallel on the front of the SSG, I will consider using similar growth for each. Also, PERT graphics will show if the trend lines for sales and earnings are growing in tandum.
If the trend lines are not parallel, the preferred procedure is needed as a second opinion for future earnings growth. (See slide 7) Taking a 10 year comparative view of sales and earnings growth (slide 8) we see the trend lines running nearly parallel. Those times when the trend lines are growing apart, sales growth is greater; when the trend lines are growing together, earnings growth is greater.
The preferred procedure allows us to use judgment on the variables affecting earnings. You can compare the computer trends with the data that is published in VL. (The # of shares and tax rate are listed on the VL report.) Future Pretax Profit Margins can be calculated from the VL data by adding the tax back into the Net Profit Margin. For FDS, we see that 35% of the Pre Tax income was paid in taxes. (See slide 9) By dividing the net profit margin by 1 minus the tax rate, we will have the Pre Tax Margin 3 to 5 years into the future. (22.2 / (1-.35) = 34%) The VL number compares well with the 5 year average PTM from the preferred procedure which was 34.6%. Management has predicted Operating Margins in the 30.5% to 32.5% range, which is lower than the predictions at VL. Thus, while working with the preferred procedure for FDS, you can use Pre Tax Margins of 32.5% to 34.5% and be safe.
When deciding on the # of shares outstanding, I usually go with the computer average unless I read something in the management discussion that tells me to do otherwise. I noticed in the last 10Q from FDS that the Co. has purchased and granted about the same number of shares in the last 2 years. However, going forward, management is preparing to give out more shares as part of the Co. performance based compensation. This will have an effect on the reported earnings as well as the Operating margins in the future.
The tax rate is also often referred to in the quarterly management discussion. Sometimes there are changes in the rates can have a significant effect on the earnings of the Co. FDS is expecting an increase in the tax rate due to the expiration of a tax credit for Research and Development in 2008. Although not large, the Co. expects these changes to result in tax rates of 34-35%. (See slide 10)
For page 1 of the SSG, I have predicted sales growth of 14%, to $965M. I feel that the economy may be slowing to the point where contraction occurs. I know from the recent past that sales for this company may slow also and it may take a few years to recover. I used the preferred procedure and predicted earnings growth of 13.5%, to $4.22. My sales and EPS predictions compare well with VL; $965M vs. $925M and $4.22 vs. $4.25.