Figuring Out FactSet (FDS)

FactSet Research Systems (FDS) creates customized databases and other software tools for investing professionals who typically pay a subscription fee. It is considered a small company based on revenues and has an impressive record of strong and consistent growth: over 20% per year Sales and EPS growth for the last 5 and 10 years.

Its share price, however, has fallen 13% in the past six months and 19% in the last three. Presumably, the market is worried that FactSet’s sales will suffer given the current turmoil in the financial and banking sectors.

Cy Lynch, a NAIC guru and investing professional, shared his FactSet SSG in the March issue of Better Investing magazine. I thought it would be interesting to compare his SSG with mine and with Take Stock, an on-line program at Stock Central.com. Take Stock is designed to produce a conservative analysis with one-click that is based solely on historical data and allows no judgments or options by the user.

Here’s what I found:

FactSet Research (FDS)	Cy Lynch SSG	Armin Fields SSG	Take Stock
Analysis Date	1-11-08	1-17-08	2-1-08
Stock Price	$52.63	$51.80	$56.04
Sales Growth	16.00%	16.00%	18.50%
EPS Growth	15.00%	16.00%	18.50%
Forecast High PE	30.0	23.0 (see sixth comment below)	29.9
Forecast High Price	$135.60	$108.10	$149.33
…..Value Line High Price on 12-7-08 = $65-100 when FDS at $59.99…..
Forecast Low PE	17.2 (2004 & 07 out)	15.0	16.4
Forecast Low Price	$43.00 (open-ended option)	$33.60 (growth company option)	$35.57
Up/Down Ratio	8.6	3.1	4.8 (imputed)
Total Return	21.3%	16.5%	22.2%
Data	S&P	S&P	Hemscott
PTPM 5 yr ave and trend	34.6% trend even	34.6% trend even	34.6%
…….PTPM Industry Average = 23.00% at MSN; 21.56% at Reuters……
ROE 5 yr ave and trend	25.3% trend even	25.3% trend even	30.9%
……..ROE Industry Average = 04.4% at MSN; 25.50% at Reuters…….

Comments and Clarifications:

– Cy wrote that his 16.00% Sales Growth estimate appeared reasonable because it was in the middle of the 14-18% range forecast by analysts. However, he did not mention which analysts he checked nor how many, and I know of no analysts that make a 5 year sales forecast: not Reuters, not Zacks, not Value Line, not Thomson FN/First Call, not FactSet CallSreet, and not S&P. [3-10-08 addendum: I just learned that Zacks at Zacks.com does make a 5 year sales estimate.]

– While Cy relied on analysts as the basis for his Sales Growth estimate, he did not rely on them to inform his 15.00% EPS Growth rate. Instead, he used NAIC’s Preferred Procedure and made his own estimates for Profit Margin and Shares Outstanding. Cy did not consider using analyst EPS estimates at all, not even to check if his Preferred Procedure’s 15.00% was unduly conservative or overly optimistic. Ignoring analyst earnings estimates seems irrational to me, especially after checking their sales estimates.

– For his Forecast High PE, Cy reduced the 5 year average High PE from 31.6 to 30.0, without explanation and which seems like a trivial reduction, but did not eliminate any outliers. To get his Forecast Low PE, he eliminated 2004 and 2007 as outliers from the 5 year average Low PE.

– Cy’s $135.60 Forecast High Price seems way too high as it is 35.6% or $35.60 per share more than the high end of Value Line’s $65-100 estimated High Price. Take Stock’s Forecast High Price was even higher, some 49.6% or $49.57 more than VL. I’m willing to exceed VL by 10-15%, maybe even 20-25% if I know something about the company besides VL’s report, but not by 35% and never by 50%.

– My projected EPS growth rate came from the estimate by Reuters.com less one Standard Deviation which the web site provides (18.33 – 1.25 = 17.08) and which I then modestly reduced to 16%. And, I know how this EPS compares to estimates from Zacks (17.00%, 1 analyst), Value Line (17.50%, 1), Thomson FN/First Call (18.00%, 3), FactSet CallStreet (18.00%, 2), S&P (18.00%), and Take Stock (18.50%).

– I never want to substantially exceed Value Line’s High Price estimate without a good reason, and here I had none because all I had read was VL’s report and a few articles. So, I crafted a Forecast High PE which, together with my Projected EPS, brought me close to VL’s estimate.

– I used two sources for the industry data. At MSN, FDS is considered in the Information and Delivery Services sub-industry (13 companies) which is part of the Computer Software industry; at Reuters, FDS is placed in the Computer Services industry (312 companies). The different industry sizes led to very different industry averages for ROE. FactSet exceeds those industry averages for Pre-Tax Profit Margin and for Return on Equity at both web sites.

– Armin