Get Your Facts Straight: FactSet Research Systems Stock Is Set to Rise

Source: Thinkstock

Source: Thinkstock

FactSet Research Systems Inc (NYSE:FDS) is a very well-known and well-respected company on Wall Street. As well it should be, as hedge funds and market movers are among its customers. The company is also quite profitable, raking in hundreds of millions of dollars each quarter. If you do not know the company, I suggest you investigate, as the stock appears to be breaking out. It is up 8 percent in the last month alone. The company specifically provides integrated financial information and analytical applications to investment community in the United States, Europe, and the Asia Pacific. The company combines content regarding companies and securities from various markets into a single online platform of information and analytics for portfolio managers, research and performance analysts, risk managers, marketing professionals, sell-side equity research professionals, investment bankers, and fixed income professionals.

The company’s applications provide users access to company analysis, multi-company comparisons, industry analysis, company screening, portfolio analysis, predictive risk measurements, alpha testing, portfolio optimization and simulation, and real-time news and quotes, as well as tools to value and analyze fixed income securities and portfolios. FactSet Research Systems also offers various solutions for investment managers, including portfolio analysis, equity analysis, economics and market analysis, quant and risk analysis, fixed income analysis, and research management solutions. The company’s solutions for banking and brokerage professionals comprise creating models and presentations in Microsoft office, company and industry analytics, idea screening, deal analytics, people intelligence, and wireless access. On the back of its recent performance, I think the stock is a good buy at current levels.

In its most recent quarter, which ended May 31, 2014, revenues advanced to $231.8 million, up 8 percent over the prior year. Included in this total was $3.7 million from acquisitions completed since June 2013. Operating income was $73.0 million compared to $71.6 million in the year ago quarter. Net income was one of the metrics that was down. It came in at $51.5 million versus $53.4 million a year ago. Diluted earnings per share was $1.21 compared to $1.20 in the same period of fiscal 2013.

The company’s adjusted operating income for the quarter increased 6 percent over the prior year. Adjusted operating income excludes a non-cash pre-tax charge of $1.4 million related to vesting of performance-based options in connection with StreetAccount and a $1.6 million pre-tax legal charge primarily from settling a claim. Adjusted net income rose 6 percent and excludes the after-tax stock-based compensation charge of $1.0 million, the after-tax legal charge of $1.1 million, and $0.6 million in income tax benefits from finalizing prior years’ tax returns. Adjusted net income in the year ago quarter excludes income tax benefits of $3.3 million related to the U.S. Federal research and development tax credit and finalizing prior years’ tax returns.

What is key to realize is that adjusted diluted earnings per share grew 11 percent to $1.25. It is, however, important to note that this $1.25 excludes $0.02 from stock-based compensation, $0.03 from a legal charge primarily to settle a claim, and $0.01 in income tax benefits. Prior year adjusted diluted EPS of $1.13 excludes income tax benefits of $0.07 per share from the U.S. Federal R&D tax credit and finalizing prior years’ tax returns. Operating margin was 31.5 percent compared to 33.4 percent a year ago. Acquisitions completed since June 2013 reduced the operating margin.

I would also like to highlight that annual subscription value totaled $932 million at the end of the quarter, up 7 percent organically over the prior year. Further, this increased $12.3 million over the last three months. Buy-side clients account for 83.1 percent of annual subscription value and the remainder from sell-side firms who perform M&A advisory work and equity research. Annual subscription value at any given point in time represents the forward-looking revenues for the next 12 months from all services currently being supplied to clients. Philip Hadley, Chair and CEO, stated:

I’m pleased to see that our annual subscription value growth rate accelerated to 7 percent and adjusted earnings per share grew by 11 percent in the just completed third-quarter. We continued to capitalize on our opportunities as evidenced by adding 30 net new clients and 620 net new users in the past three months. I’m also excited to announce that Phil Snow has accepted the role as President, effective July 1.

Now, looking ahead, the stock is a solid buy. The company is project further growth into the next quarter. Revenues are expected to range between $235 million and $240 million. Operating margin is expected to range between 32.5 percent and 33.5 percent, which includes a 100 basis point reduction from the recent acquisitions of Revere and Matrix. The annual effective tax rate is expected to range between 30 percent and 31 percent and assumes that the U.S. Federal R&D tax credit will not be re-enacted by the end of the fourth quarter of fiscal 2014. Diluted earnings per shares are expected to come in the range of $1.30 and $1.32. The earnings expectations dipped because the lapse in the U.S. federal research and development tax credit on December 31, 2013 reduced each end of the diluted earnings per share range by $0.03. That said, the stock is breaking out, is cheap on a price-to-earnings multiple basis and pays a 1.5 percent dividend yield.

Disclosure: Christopher F. Davis holds no position in FactSet Research Systems and has no plans to initiate a position in the next 72 hours. He has a buy rating on the stock and a $130 price target.

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