FactSet Research Systems

The gold of the 21st century

If you've been following my blog for a while, you probably know that I really like shovel suppliers. What do I mean by that? Simple: back in the day, who had the better chance of success - the gold digger or the shovel supplier? Of course we don't want to leave our investments to luck, so we have to bet on solid and promising business models. That's why today I'd like to introduce FactSet Research Systems. Okay, I admit the comparison is a bit of a stretch. After all, FactSet doesn't supply shovels, it supplies the precious gold of the digital age itself - figures, data & facts.

FactSet provides financial data, analytics tools, and software solutions that banks, insurers, and other institutions urgently need. Websites such as Aktienfinder (with whom I did an interview last week) are among its customers too.

The history and business model of FactSet Research Systems Inc.

If you want to dive a bit deeper into the history of financial data, you should read my article on S&P Global Inc. at this point. The story of FactSet goes back to 1928, when Howard E. Wille was born in Greenwich (Connecticut). After finishing school, he started working as a securities analyst and investment manager for several firms until, in 1961, he became Chief Investment Officer of the Piedmont Advisory Corporation. Almost 5 years later, he got a job offer from the New York investment firm Faulkner, Dawkins & Sullivan Inc., where he was to work as a partner and head of research. Without thinking twice, he accepted the offer and then researched innovative ways of providing complex financial data. When Shearson Hayden Stone Inc. took over the firm in 1977 and disagreements arose over Wille's work, he decided to quit. Together with his colleague Chuck Snyder, who worked as director of computer research, he founded the FactSet Research Corporation in 1978.

The two recognized the urgent need for short, concise financial analyses. So they published four-page financial overviews of various companies, which they called "Company FactSet." They sent their analyses to banks and investment houses in Manhattan by bike courier. Snyder, who was considerably younger and more tech-savvy than Wille, took care of the technical side of delivering the data, while Wille focused on sales. At that time, computer analysis was still in its infancy, and you needed lots of programmers to merge different data sets from the bulky mainframes and make them user-friendly. No wonder many analysts kept relying on paper. From the very beginning, FactSet made it its mission to use these emerging technologies to give its customers useful financial data and analyses in an uncomplicated way. After more than two years of research and development, FactSet was ready and launched its first terminal in 1981. A computer program pulled data from a wide range of sources, calculated some values itself, and delivered complete analyses at the push of a button.

FactSet, which was now winning more and more customers, kept expanding its service. Soon came the first interfaces to spreadsheet programs and the first stock screeners. There, users could filter stocks by the criteria they entered, which made finding new investments much easier. In 1991, FactSet released its first Windows program, paving the way for new customers. It also opened its first offices in Europe and Asia. In 1996, it went public on the New York Stock Exchange under the new name FactSet Research Systems Inc. The company continuously invested in developing its services further. In the process, it didn't hesitate to make acquisitions either. It not only acquired a database from Thomson Reuters, but in recent years has increasingly bought smaller financial data providers. As a result, FactSet is very well positioned today and supplies around 133 thousand customers worldwide with its software solutions and analytics tools. Still, there's plenty of growth potential left.

How do I rate FactSet's future prospects?

First, let's take a look at the figures for the fourth quarter of 2020. FactSet was definitely convincing here - quarterly revenue rose to $383.6 million, an increase of 5.3 percent over the prior-year quarter. This increase is due to positive developments in the analytics and wealth management and software solutions areas. Adjusted earnings per share rose 10.3 percent to $2.88 ($2.61 in Q4 2019). If you look at the revenue breakdown, you quickly notice that the company generates the largest share of its revenue in its home country, America (page 8 of the quarterly report). Nevertheless, it's currently growing much faster in Asia than in Europe or America.

FactSet divides its business model into four different divisions. In Research Solutions, it provides services such as financial ratio analysis, screening options, and company news. Analytics Solutions is FactSet's second-largest revenue segment and provides risk analyses and assessments. Wealth Solutions focuses on wealth managers and helps them monitor and plan their portfolios. Last but not least, FactSet also offers Content & Technology Solutions. Here, financial data is prepared and integrated into users' applications through various interfaces (as with Aktienfinder). This area is currently growing the fastest.

With Bloomberg, Thomson Reuters, and S&P Capital IQ, FactSet definitely doesn't have weak competition. Still, FactSet keeps catching up because it relies on state-of-the-art solutions with intuitive software. In this area it's ahead of its competitors. Analysts who have worked with Bloomberg terminals for decades, however, are hardly going to want to switch and learn everything all over again. But anyone who has worked with FactSet is usually convinced by it. This is backed up by the fact that a full 95 percent of customers renew their contracts year after year. So from my point of view, chances are good that FactSet will keep growing in the future and might even seize market leadership.

And what about the dividend?

As is not unusual for tech companies, FactSet also reinvested its profits in its own growth for a long time. It only began sharing profits with its shareholders in 1999. Since then, the company has also managed to raise the dividend year after year. The dividend growth rate over the last 10 years is a solid 12.7 percent. The current dividend yield of 0.9 percent isn't particularly high, but that's also due to the stock price's outstanding run. The current payout ratio of just under 30 percent also gives hope for long-term growth.

Conclusion:
FactSet Research Systems developed into one of the most important and successful providers of financial data. Its systems and software solutions have become indispensable in the industry. There's no doubt that long-term growth potential is still there, which is why I'd add the stock to my portfolio even at today's price.