FDS - Factset Data Systems

[Palantir]

Many of the users on this site are familiar with this product, and use it regularly. What I just noted is that this firm has had very strong and stable growth, with stable margins. I believe there are some decent switching costs - no need to switch as long as things are going well. Balance sheet is solid, good cash position, no debt, and they are retiring stock. I don't have a firm opinion on this yet, but it looks really promising. I think it can be broadly thought of as an enterprise services firm, and maybe the economics of this are like economics of IT providers.

 

 

Valuation is rich, but maybe growth will justify this.

[Phaceliacapital]

"Valuation is rich"

 

What is your ballpark figure?

 

I like the idea and will look into it this weekend, thanks!

[Palantir]

I just did a back of the envelope calculation, then again, I don't have experience with high level model building. But using a discount rate of 9% (historical equity return), assuming a growth rate of 8% that declines to 4.6% over 20 yrs and then to 3% to infinity, I get an IV = $132.30.

 

But that's not the price we want to invest in, I have a target investment goal of 12%, so I use a 12% discount rate with the above assumptions and get a "buy" price of = $86.24, which is moderately below current value.

 

 

However, I believe I have underestimated growth, if you have a better understanding of predicting growth rates, interested in hearing it.

[Yours Truly]

Great company, I would like to purchase this in the low 80's for a 15% return

[Palantir]

This one has missed expectations, may now be a good time for a more detailed look. Anybody have a comment on switching costs?

[Yours Truly]

This one has missed expectations, may now be a good time for a more detailed look. Anybody have a comment on switching costs?

 

The company has a fantastic track record of success and low capex with some pricing power... the valuation is just a bit tad rich for my blood.. check out their track record (pulled from my personal google drive watch list using CapitalIQ data):

[Palantir]

Beautiful growth, about 15% annually, and margins have strengthened along with growth. Me likey. Are you still sticking with your "buy" target of low 80s?

[Palantir]

Actually, so I estimate a conservative growth rate of 9% that drops to 6.6% in ten years, and with a discount rate of 12%, assuming no dilution, and I get an IV of 93....this may be cheaper than it looks.

[Ross812]

 

 

[Guest deepValue]

You might try thinking about it like this: the company earned $205mm in fcf last year and has a current market cap of $4bn. $205mm/$4bn = 5% initial yield. If you want a 12% return, you need roughly 7% annual fcf growth and intelligent capital allocation.

[Ross812]

17.25% Revenue growth rate with a 0.44% variance and 16.8% EPS growth rate with a 0.48% variance.  The average P/E is 23.35x over the last 10 years. If you want a truly conservative way to value this, my rule of thumb for a growth company with a low variance in growth rate is: P/E of FY 2013 = 15 + .5*(%GR-15). So this would be 15 + 0.5*(16.8 -15) =  15.9x '13 Earnings which is $72.50.

[Palantir]

Last two posters have dropped some serious knowledge. Much appreciated by yours truly.

[negative alpha]

This one has missed expectations, may now be a good time for a more detailed look. Anybody have a comment on switching costs?

 

Very sticky (at least from the perspective of a Portfolio Analysis user). Once you start feeding Factset all your data it's very hard to switch vendors. Your infrastructure is essentially built around the system and you become reliant on it for analysis and reporting. Actually, there aren't any alternatives although Bloomberg and Morningstar are introducing products.

 

 

 

[Guest deepValue]

Actually, there aren't any alternatives

 

What about Cap IQ? I've never used their portfolio analysis, but I consider just about everything that I use on Capital IQ to be superior to that of FactSet. But plenty of people disagree with me.

[negative alpha]

Actually, there aren't any alternatives

 

What about Cap IQ? I've never used their portfolio analysis, but I consider just about everything that I use on Capital IQ to be superior to that of FactSet. But plenty of people disagree with me.

 

I stand corrected. Let me change any to many.

 

Wouldn't doubt that Capital IQ is better. Factset can really be a challenge to use.

[ShahKhezri]

Actually, there aren't any alternatives

 

What about Cap IQ? I've never used their portfolio analysis, but I consider just about everything that I use on Capital IQ to be superior to that of FactSet. But plenty of people disagree with me.

 

I stand corrected. Let me change any to many.

 

Wouldn't doubt that Capital IQ is better. Factset can really be a challenge to use.

 

I agree...I prefer IQ.

[Palantir]

This is good, I love capital light businesses with high switching costs....yummy.

[cashisking]

A little something for the "other side" if I may...

 

Use of dilutive incentive options is very high (options outstanding as % of total shares is over 13% currently). Management buys back stock to offset dilution, but executes the buybacks regardless of valuation. Since this is an ongoing feature of compensation, run the net effect of option dilution and share buybacks as though it was an operating expense - you will see cash flow is a lot lower than it seems at first glance...

 

In regards to customer stickiness - although switching costs may be high, it doesn't cost much to get rid of the licence once the user is gone (or fired). Licence length terms are 1 year or less.

 

I guess penetration would also be a consideration - once competitors and their user base is taken into account (Bloomberg and CapIQ), what is the ultimate runway for growth from here?

 

Not sure... But the business characteristics are beautiful (capital light, high ROIC). FWIW, at a (much) lower price I would bite

[WhoIsWarren]

I haven't used Factset for about 10 years, so my memory is fuzzy and my experience outdated, but isn't Bloomberg a very very serious threat to Factset's long-term viability, let alone it's growth prospects??  And if not now, you'd have to suspect it will be in the future as it extends its tentacles outwards.

 

In 2010 Li Lu gave a lecture in Greenwald's Columbia class and he spoke about Bloomberg.  Here are some brief notes on the lecture, but it's better if you watch the video (which I can't find). 

 

http://streetcapitalist.com/2010/05/04/li-lu-berkshire-hathaway-cio-candidate/

 

In short, Bloomberg has reached a point of inflection, where it will ultimately end up as the monopoly provider.  Users get used to a certain system and are loath to changing.  Students use Bloomberg in college / university and demand Bloomberg when they move into employment.  From memory Li Lu compares it to the medical industry, where med students get used to certain surgical equipment etc., no doubt provided for free / very cheaply by the medical equipment manufacturers.  So then when those students become surgeons they demand that equipment in the hospitals they work in.  Li Lu describes it as a winner-takes-all business model, which strikes me as a statement to take note of.  Just to confuse things however, he said he invested in CapitalIQ.....which wouldn't fit in with that view.

 

I can see how switching costs might be a factor in favour of Factset, as users have invested a lot of time setting up spreadsheets and screens etc, which would need to be labouriously re-programmed in a switch.  I had a trial with Capital IQ recently and I'm nearly positive that Capital IQ offered to re-create all my current B'berg spreadsheets.  I admit there's probably going to be some teething problems there -- and maybe that's enough of a deterrent to switching.  Still though, if teething problems is the Factset moat, surely this is something competitors can chip away at over time?

 

Factset has managed to grow at a tremendous clip over the years, so they must have something really powerful going for them.  However it seems dangerous to me to extrapolate that growth into the future......

 

Edit: re-reading my post.....I realise my first paragraph probably comes across as overly alarmist ("very very serious threat to Factset's long-term viability").  But one really should question future growth assumptions, right?

[fareastwarriors]

We use FactSet at work. It's okay. I feel like it's kind of clunky and a bit slow. But their Portfolio Analytics is a solid tool. We use it extensively.

 

I also noticed some of the younger guys (recent grads or 1-2 yrs of exp) using FactSet over CapIQ or Bloomberg so that is a good sign.  But they are not the majority. Most of the guys here use CapIQ for their research.

 

 

[constructive]

17.25% Revenue growth rate with a 0.44% variance and 16.8% EPS growth rate with a 0.48% variance.  The average P/E is 23.35x over the last 10 years. If you want a truly conservative way to value this, my rule of thumb for a growth company with a low variance in growth rate is: P/E of FY 2013 = 15 + .5*(%GR-15). So this would be 15 + 0.5*(16.8 -15) =  15.9x '13 Earnings which is $72.50.

 

The fact pattern I see is that EPS growth rates have declined slightly over the past few years, which is a different concept from mere variance.

 

Where do you get the 16.8% growth rate? That sounds high.

[mattman587]

Not exactly related to the original post, but any users of CapIQ out there personal users?  What is the cost for Joe Schmoe for personal use?

[Ross812]

17.25% Revenue growth rate with a 0.44% variance and 16.8% EPS growth rate with a 0.48% variance.  The average P/E is 23.35x over the last 10 years. If you want a truly conservative way to value this, my rule of thumb for a growth company with a low variance in growth rate is: P/E of FY 2013 = 15 + .5*(%GR-15). So this would be 15 + 0.5*(16.8 -15) =  15.9x '13 Earnings which is $72.50.

 

The fact pattern I see is that EPS growth rates have declined slightly over the past few years, which is a different concept from mere variance.

 

Where do you get the 16.8% growth rate? That sounds high.

 

I just annualized .58 in 2003 to 4.12 in 2012. Pretty quick of the cuff. Yahoo had ~14% for the five year. I didn't do much work on this, I just the it in my spread sheet and applied my p/e to earnings growth role of thumb to it.

[krycek32]

In my opinion, FDS is rich and set-up for a multiple contraction. FDS investors perceive the company to be a growth stock when in reality growth is slowing and competition is picking up.

 

Revenue growth has slowed to +MSD-HSD due to lapping price increases and weak end market growth, there's really no operating leverage as they constantly reinvest to develop content leaving net income to grow more or less in-line with revenues. company buys back ~2% of stock each quarter so EPS is growing say ~10% a yr, add in the 1.3% dividend yield and you're paying 20x for that? i don't get it. luckily there's a lot of earnings transparency from their backlog and high retention rates so low chance for an earnings miss but i just think the multiple is stretched. 

 

let's not forget that FDS gained a ton of market share over the last 3-5 years from Thomson Reuters, which is now re-awakening with their Eikon desktop launch. In my opinion, Eikon and Factset workstations are interchangeable, but Eikon is much cheaper. On the other hand, Factset workstation can be as expensive as Bloomberg, which makes no sense to me. 

 

With a short interest of 15% and 15 days to cover, it doesn't sound like I'm the only one raising an eyebrown on FDS.

[rb]

I've been looking lately at FactSet.

 

They're growing steady at about 7% per year and. At 19x PE they're not a screaming buy but looks fairly valued at most. Which is pretty good in this market.

 

However I never used their services before so I have no idea whether they really good or they're crap. I was wondering whether anyone here has used them and can chime in with their experience.

 

Thanks.