The modern economy is, in large part, centered around information. Information has become a valuable product that helps businesses and consumers to operate optimally and, despite the high cost it can sometimes incur, the end goal is to ultimately generate value for all parties involved. One company dedicated to providing financial data and analytics in order to help its customers achieve success is FactSet Research Systems (NYSE:FDS). Over the past several years, this and her prize has exhibited consistent and attractive growth. This is true not only on the top line but on its bottom line as well. Add on to this the fact that management just made a sizable acquisition that should help to propel shareholder value even more in the future, and it does make for an interesting prospect to consider. Admittedly, shares of the business are rather lofty at this time. But this is common in this space and, sometimes, it can make sense to buy into a firm at a premium if it is a quality operator. All things considered, I would make the case that FactSet Research Systems is more or less fairly valued at this time. But investors would be wise to keep an eye on it in the hopes that shares might ultimately become cheaper at some point in the future.
A play on financial data
In its over 40 years in operation, FactSet Research Systems has grown to operate a large platform dedicated to delivering data, analytics, and various technology solutions for its customers. For the most part, these are global financial professionals who rely on data in order to make investments and other financial decisions. According to management, over 160,000 asset managers and owners, as well as other financial customers, ranging from private equity and venture capital to banking, use the firm’s solutions to look for opportunities, explore ideas, and put their conclusions into motion. The company offers this data through both its desktop and mobile platforms. These can be configured to meet each customer’s needs. Customers can have access to various data feeds, cloud-based digital offerings, and the company’s portfolio of APIs. The company’s offerings stretch across research and advisory features, analytics and trading information, providing information for buy-side investment firms, and for sell-side investment firms as well.
For the most part, FactSet Research Systems generates this revenue from subscriptions that customers pay on a recurring basis in order to access the workstations, portfolio analytics, and market data the company aggregates. Operationally, however, the company does have three different segments that it reports information for. But these segments are not based on different types of operations. Instead, they are based on geography. During the company’s 2021 fiscal year, the Americas segment represented 63.3% of the firm’s overall revenue and just 46% of its profits. The EMEA (Europe, Middle East, and Africa) segment made up 26.9% of sales and 33.7% of profits. And the Asia Pacific segment accounted for 9.8% of revenue but 20.3% of overall profits.
When it comes to individual clients, FactSet Research Systems recorded 6,453 last year. That represented a 9.8% increase over the number reported one year earlier. These clients are responsible for the 160,932 professionals who are currently using the company’s platform. This number is up 14% year over year. It should come as no surprise then that revenue for the business also increased in 2021 relative to 2020. Sales for the year came in at $1.59 billion. That represented an increase of 6.5% over the $1.49 billion generated one year earlier. But the increase experienced in sales here was not a one-time thing. In fact, for each of the past five years, sales rose year over year. Back in 2017, for instance, the company reported revenue of just $1.22 billion.
While the revenue trajectory for the company is important, it’s not as important as the profits and cash flows. During 2021, net income for the business was $399.6 million. That represented a sizable increase over the $258.3 million generated back in 2017. Like revenue, profitability has increased each year relative to the year before. The same trend could be seen with operating cash flow. Between 2017 and 2021, it expanded from $320.5 million to $555.2 million. Meanwhile, EBITDA for the business grew from $434.6 million to $626.4 million.
So far, the 2022 fiscal year is looking up for the enterprise. Revenue in the first three months of its 2022 fiscal year totaled $424.7 million. That’s up from the $388.2 million generated the same time one year earlier. Net income increased, climbing from $101.2 million to $107.6 million. Operating cash flow did decline, dropping from $89.3 million to $72.9 million. But if we adjust for changes in working capital, it would have risen from $138.9 million to $150.1 million. Also on the rise was EBITDA, which increased from $158.3 million in the first quarter of 2021 to $163.6 million the same quarter of this year.
When it comes to the 2022 fiscal year as a whole, management provided guidance calling for revenue of between $1.705 billion and $1.72 billion. Adjusted net income should be between $461 million and $472 million. Management provided no guidance when it came to other profitability metrics. But if we assume a similar year-over-year growth rate for these other metrics that we should see with profits, then operating cash flow should be around $648.2 million, while EBITDA should be around $731.3 million. Unfortunately, this guidance came out prior to management’s announcement, in late December, that it was acquiring CUSIP Global Services from S&P Global (SPGI) in a deal valued at $1.925 billion. In order to complete this transaction, the business issued $1 billion worth of stock, with half of it carrying an annual interest rate of 2.9% and coming due in 2027, while the other half is at a 3.45% interest rate and will mature in 2032.
Not much is known about the profitability of this acquisition. But we do know that it is responsible for about $175 million in annual revenue. If we assume the same kind of margins and taxes associated with that revenue as what we saw for FactSet Research Systems in its 2021 fiscal year, and factor in the estimated $31.75 million in annual interest associated with the issued debt, then we can estimate the impact this will have on cash flows for the business. Based on my calculations, this would take the company’s adjusted net profits up to $483.3 million for the 2022 fiscal year. Operating cash flow would be about $677.5 million. And EBITDA would come out to $800.2 million.
Taking these figures, we can effectively price the business. Based on 2021 results and ignoring the aforementioned acquisition, the company is trading at a price-to-earnings multiple of 40.4. This drops to 34.6 if we rely on management guidance for 2022. The price to operating cash flow multiple declines from 29.1 to 24.9 over this same window of time. And the EV to EBITDA multiple should decline from 25.6 to 21.9. If we make the adjustments necessary for the acquisition and take my estimates into consideration, then the price to earnings multiple for the company, for its 2022 fiscal year, should be 33.4. The price to operating cash flow multiple is 23.8. And the EV to EBITDA multiple should be 22.2.
Next, I decided to compare FactSet Research Systems to five similar firms. For this analysis, I looked at these companies on a forward basis and compared them to the pro forma figures I estimated for our prospect. On a price-to-earnings basis, these companies ranged from a low of 19 to a high of 45.6. Four of the five companies were cheaper than our prospect. Using the price to operating cash flow approach, the range was from 8.9 to 46.4. In this case, only one of the five firms was cheaper than our target. And using the EV to EBITDA approach, the range was from 13.2 to 33.6. In this scenario, three of the five companies were cheaper than our prospect.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|FactSet Research Systems||33.4||23.8||22.2|
|CME Group (CME)||33.1||37.3||26.2|
|Intercontinental Exchange (ICE)||24.4||24.8||18.8|
|Cboe Global Markets (CBOE)||19.0||8.9||13.2|
|MSC Inc. (MSCI)||45.6||46.4||33.6|
Based on all the data provided, I can say that FactSet Research Systems looks to be an excellent company. The stability of the business is impressive and I am a huge fan of enterprises that generate revenue from subscription-like services. With annualized subscription values of about $1.68 billion as of at the end of its latest fiscal year, the company does look set to grow even without the aforementioned acquisition. I do believe that shares are rather lofty. But given the circumstances, this premium might not be unreasonable. All in all, however, I do think that shares probably are more or less fairly valued at this time.