FacetSet: Despite Solid 4Q14 Results William Blair Remains On The Sidelines

In a research note released today, William Blair analyst Timothy McHugh reaffirmed a Market Perform on FacetSet Research Systems (NYSE:FDS), following the release of the company’s fiscal fourth-quarter results. No price target was assigned.

McHugh wrote, “FactSet reported solid fiscal fourth-quarter results that reflect a continuation of recent trends in the business and were generally in line with or a touch better than expected. The key trend from the quarter is that FactSet’s ASV growth continued to accelerate (5.5% in the second quarter, 6.5% in the third, and 7.3% in the fourth) and growth in the number of users was strong sequentially (up 7.2% year-over-year). Organic growth from buy-side clients picked up slightly to 8.5%, and growth from sell- side clients has gradually improved (from declines a year ago) to the low-single digits now. These trends will bolster the thesis of bulls on the stock that are hoping strong equity markets (as well as continued market share gains from Thomson) will continue to provide a boost to buy-side clients and an improved M&A environment will help drive modest growth in the sell-side. This is also a positive sign for McGraw Hill Financial’s (MHFI) S&P Capital IQ segment.”

McHugh continued, “FactSet’s enterprise value is currently 13 times adjusted EBITDA (excluding stock-comp). The company’s enterprise value compares to 12 times for Solera (SLH), 13 times for Verisk (VRSK), 11 times for Corporate Executive Board (CEB), 10-11 times for the credit rating firms (Moody’s [MCO $94.71; Outperform] and McGraw Hill Financial), and 16 times for Gartner (IT). With the exception of Gartner (which benefits from favorable working capital characteristics, increases revenue at a low-double-digit pace, and is expanding its profit margins), FactSet’s EBITDA valuation is toward the high end of the peer group. Given this combined with our estimates not changing much, we see a better risk/reward in some of the other stocks in the peer group. At this point, we think that investors need to believe that organic ASV growth will continue to accelerate toward 10% (and profit margins will be stable) in order to believe the stock is undervalued still. We are not confident in projecting that, so our rating remains Market Perform.”

According to TipRanks.com, which measures analysts’ and bloggers’ success rate based on how their calls perform, analyst Timothy Mchugh has a total average return of 27.8% and an 88.9% success rate. Mchugh is ranked #589 out of 3298 analysts.

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