FDS Q4 08

FDS recently reported it’s 4^th quarter results. Although revenue continues to grow at a good pace, and above the rate used in the original SSG, earnings are decreased and somewhat confusing.

From the S&P data feed used in the Stock Analyst program, earnings per share increased 4.8% ($.62 to $.65). However, on the financial statement released from FDS, as well as those from Reuters, EPS increased 11.4% ($.60 to $.67) on a GAAP basis. FDS also received a tax credit in the 4^th quarter of 2007 that they did not receive this year. This absence of  the tax credit, along with dilution related to the purchase of Thompson’s fundamental data base, resulted in the growth in Pre tax income of 13.4% (similar to what was projected for EPS growth on the SSG) even though the actual EPS did not grow to that degree.  I would like to see what numbers are imported into TK6 with the Morningstar data.

Even with the recent financial troubles on Wall Street (have you heard about the $700B bailout?) FDS continues to grow Revenues and Income at rates above the original SSG:

• Revenue increased 19%

• Operating Income increased 18%

• PreTax Income increased 13.4% (Less than Operating income because of decrease in Non-operating Income/Lower interest rates)

• Net Income increased 9.4% (Decreased due to higher tax rates)

• EPS increased 4.8% (S&P) or 11.4% (Co. data)

Other points of interest from the recent Qtr Report:

1.      The Co. CEO believes that the addition of Thompsom data base to FDS will add $100M in Revenues from it’s existing clients.

2.      Client retention remains at 95%

3.      The dividend increased 50% to $.18 from $.12. Dividend Yield is 1.34%

4.      ASV increased 19% from the end of last year (non US clients represent 32% of this total). This includes an 18% increase in organic growth and 1% increase in new clients and currency exchange. ASV is the Co.s best guide for sales 12 months into the future. ASV was 23.1% at the time of the original study, and was 21% last Qtr. This slowdown is affected by the decrease in sell side clients. However, the 4 largest-Lehman Bros., Merrill Lynch, AIG and WaMu make up less than 1.5% of the ASV. In other words, FDS exposure to these large troubled firms is minimal.

5.      Revenue Guidance next Qtr. is $154M to $157M (14.7% to 17%)

6.      Tax Guidance is 33.8% to 34.6%-these rates assume the US Federal Research and Development tax credit will not be re-enacted.

7.      Operating Margins Guidance 31.5% to 33%.

With the purchase of Thompson’s data base, FDS has stated that there will be a decrease in EPS due to share dilution. This will cause a decrease in EPS of $.04 in each of the 4 quarters of 2009.  Therefore I have adjusted my SSG for earnings growth. Because of the dilution the Co expects, I predicted EPS growth of 7% in 2009, and 13.5% thereafter. That gave me an Est, High EPS of $4.40. (This compares to Value Line 3 to 5 year EPS of $4.40) My forecast High Price of $114.40 also compares well with VL of $110.

Please look at and comment on my updated SSG. At the current price, the PE Relative Value is 103.5. Annual Total Return based on the high PE is 17.3%. Annual Total Return based on the average PE is 12.4%. Annual Total Return based on Cash Flow is 12.7%.

Pat Landers

Pat

Thanks for your extensive review of FDS.  I am a long time holder of FDS and remain bullish despite the recent financial industry situation and thus my view may be somewhat biased.

My SSG using TK 6 is quite similar to yours and I view FDS as a long term buy at the current price.  In fact I show FDS at a buy below 52.83 and show a total return of 18.9%. 

The future of the financial industry where FDS obtains the bulk of its business is a key question to ponder.  FDS revenues are heavily dependent upon the number of people working in this industry and thus needing FDS type data.  With huge layoffs likely this is a key concern.  I see the financial industry will be significantly redefined however I do not see it going away and slowly will make a recovery in a new form that will result in significant numbers of people continuing to work in this industry. Thus I see a temporary decline may cause a slowdown in the growth of FDS revenue as seems anticipated by the recent price decline.  I do think the shifting of financial business overseas should help FDS in growing their capabilities in this area.

On the plus side the high retention rate of clients is a huge plus.  It is quite difficult for clients to shift data sources and thus this helps FDS.  However competition is aware of the high profitbility and growth of FDS and wil be working hard to make inroads into this lucrative business.   

I view the FDS mgmt team to be quite competent and have been making superb decisions in enabling the company to grow rapidly while maintaining a high level of profitability.  My main concern is they are highly compensated but perhaps that is earned based upon their accomplishments.

The recent move to increase the dividend 50% by the board is a sign they consider the FDS business to be sound.  I see FDS having FCF of over $100M per year available to grow the business, buy back shares and pay dividends.  Thus the balance sheet seems sound.

As a check to see what the experts view on FDS may be, I note Goldman Sachs rates FDS as neutral with a price target  (one year) of $60. They viewed the FY 2008 results positively and cited the password growth of 14.6%  and the 19.0% gain in Annual Subscriptions as an indicator of forward revenues. However they see decelerating growth in in passwords in 2009 as an area of concern, I think causing their neutral rating.  Their EPS estimates are 2009 $2.66 +6.4%, 2010 $3.09 +16.1% and 2011 $3.69 + 19.4%.   They cite the key risks with FDS to be 1) Cyclicality of end user demand and 2) Competitive market dynamics.  The GS view matches closely my view on FDS an gives me confidence of the future for FDS.  

From a technical view, FDS has been having a tough 2008 after hitting a peak price in 2007.  RSI seems neutral, MACD close to bullish, CMF bearish but improving and moving averages bearish.  A brighter view is the PnF chart that is bullish with a target of 87 and suport in the 50-51 area. 

My friends at Manifest are bullish on FDS with Quality rated at  82.3 and PAR at 20.0.  The AllStar rating of 99.0 is another indication of the bullish market fever on FDS.

Finally IClub seems bullish on FDS with an index of 10 (maximum rating) provided via the Roster of Quality companies provided via Toolkit 6. 

I plan to hold my FDS shares since I already have a full position but other wise would buy at this level.  I do expect 2009 will be a tough year and suspect patience wil be required before growth reaccelarates in 2010.

Thanks again for your view on FDS.  What do others think about Factset Data?

Dan Hess