A Play on the Ever-Rising Need for Financial Data
Matthew is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
FactSet Research Systems (NYSE: FDS) is a leading provider of data services to the financial industry. Over the past decade, the company’s business has really taken off, and shares have gained accordingly. With the growing need for data in the industry, is there still time to get in on this growing company, or has the opportunity passed us by?
About FactSet Research Systems
FactSet provides economic and financial data to investment professionals, combining its own content with content from hundreds of other sources into a single online data source. The company designs personalized workspaces for investment managers, hedge funds, investment bankers, quantitative researchers, and more. Their features include market analytics, financial data, financial screening, and many others.
Over the past several years, acquisitions have been one of the main drivers of growth in the company. To name a few, in 2008 FactSet purchased a copy of the Thomson Fundamentals database for $62 million, which included historical financial data on tens of thousands of companies. Last July, Fact Set acquired StreetAccount, which greatly expanded its real-time news and analytical capabilities. The company also strives to develop and perfect its own proprietary content in order to offer more differentiated content and services than any of its competitors.
Given its growth in revenues and earnings over the years, FactSet actually seems inexpensive at the current price level. At about 23 times last year’s earnings, the company’s valuation is pretty close to its historical average. FactSet is expected to earn $4.58 per share for the current fiscal year, and this is projected to increase to $5.05 and $5.73 in 2014 and 2015, respectively. This translates to a three-year average annual earnings growth rate of just under 12%, which is about what I would expect with such a P/E ratio.
Also worthy of consideration is FactSet’s modest, but significant, dividend yield of 1.4% annually, which has been raised consistently over the years. Also, one of my favorite things to see in prospective investments is more cash than debt, and FactSet definitely meets this standard, with over $200 million in cash and no debt whatsoever.
Other Ways to Play
Although not an apples-to-apples comparison, Intuit (NASDAQ: INTU) is a pretty close peer in terms of publicly traded financial data software companies. Intuit is best known for its flagship accounting and tax preparation software programs QuickBooks, TurboTax, and Quicken. Intuit has experienced similar revenue growth to FactSet as more people are transitioning to online methods of managing finances, and are expected to grow at a similar 12% rate going forward. Shares trade at a P/E of 20 times TTM earnings, and Intuit has a similarly impressive balance sheet. The company does have some debt, but it is overshadowed by a nice stockpile of cash.
Another alternative, and perhaps my favorite, is one of the retail brokerage services such as TD Ameritrade (NYSE: AMTD), which provides its clients with financial data and educational services. The company’s thinkorswim electronic trading platform is, in my opinion, the best available among the popular retail brokerage, and is especially attractive to option traders, one of the most rapidly growing types of investors. Just like the other two companies mentioned, TD Ameritrade is projected to grow its earnings at just over 12% going forward, and shares trade for around 21 times earnings.
Buy, Sell, or Hold?
All three of the companies mentioned here trade at comparable valuations and have very similar projected growth rates going forward. Although a very strong case could be made for any of them, FactSet is my favorite of the three due to its very solid balance sheet, great track record of growth and client retention, and the company’s proprietary data services products, which should give the company an advantage over other services going forward.
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Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends FactSet Research Systems, Intuit, and TD Ameritrade. The Motley Fool owns shares of Intuit. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!