- By GF Value
The stock of FactSet Research Systems (NYSE:FDS, 30-year Financials) is estimated to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $330.91 per share and the market cap of $12.5 billion, FactSet Research Systems stock appears to be modestly overvalued. GF Value for FactSet Research Systems is shown in the chart below.
Because FactSet Research Systems is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 7.9% over the past three years and is estimated to grow 5.11% annually over the next three to five years.
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid permanent capital loss, an investor must do their research and review a company's financial strength before deciding to purchase shares. Both the cash-to-debt ratio and interest coverage of a company are a great way to to understand its financial strength. FactSet Research Systems has a cash-to-debt ratio of 0.70, which which ranks worse than 75% of the companies in Capital Markets industry. The overall financial strength of FactSet Research Systems is 6 out of 10, which indicates that the financial strength of FactSet Research Systems is fair. This is the debt and cash of FactSet Research Systems over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. FactSet Research Systems has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $1.5 billion and earnings of $10.04 a share. Its operating margin of 29.75% better than 67% of the companies in Capital Markets industry. Overall, GuruFocus ranks FactSet Research Systems's profitability as strong. This is the revenue and net income of FactSet Research Systems over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of FactSet Research Systems is 7.9%, which ranks in the middle range of the companies in Capital Markets industry. The 3-year average EBITDA growth rate is 11.3%, which ranks in the middle range of the companies in Capital Markets industry.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, FactSet Research Systems's return on invested capital is 28.12, and its cost of capital is 5.80. The historical ROIC vs WACC comparison of FactSet Research Systems is shown below:
To conclude, the stock of FactSet Research Systems (NYSE:FDS, 30-year Financials) appears to be modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in Capital Markets industry. To learn more about FactSet Research Systems stock, you can check out its 30-year Financials here.
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This article first appeared on GuruFocus.