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Fair Isaac: Branching Out to Boost Growth

- By John Engle

Fair Isaac Corp. (FICO) is the data analytics giant behind the famed FICO score, the three-digit financial score crucially important to the financial success and future of many Americans. Fair Isaac is a solid play for that alone. It brings with it an enormous history of intellectual property and consistent growth. Currently, nearly every business and consumer will come across a FICO score in the United States. That demonstrated reach cannot be overstated.

This is a company that has enjoyed impressive growth over the past several years and looks poised to continue that trajectory into the future. Let's take a look at Fair Isaac and whether it is a fair play for investors going forward.

A history of exceeding expectations

Fair Isaac has a proven financial track record that has frequently exceeded market expectations. Indeed, in three of the past four quarters, the company has has beaten the analyst consensus on earnings.

Further, expectations for 2018 are high. According to newly adjusted guidance released after the passage of favorable tax reform, guidance for adjusted per-share income for 2018 is set at $6.09 - $1.52 on a quarterly basis. Earnings per share could be further bolstered this year by management's focus on aggressive stock repurchases (as opposed to dividends), which will continue well into 2018. The company bought back almost 1.5 million shares in 2017. Improving margins met with decreased share total bodes well for earnings per share.

Steady growth at low cost

Margins look to continue to improve into 2018. Cost of revenue remains consistently low and total operating expenses have yet to exceed $500 million. On $287 million of spending, Fair Isaac brought in $932 million in 2017, up from $881 million in revenue on $265 million of spending in 2016. Gross profit looks to exceed $700 million in fiscal 2018.

Plus, net income remains robust, coming in at $128 million for 2017, an increase of 17% over the previous year. If it continues to grow at around 20% year over year, net income will exceed $200 million in less than three years.

If Fair Isaac can continue to grow its business in the future and keep costs relatively low, it could prove to be a gold ticket stock. But growth requires strategic expansion. Specifically, the company's future growth depends on two strategic expansions: improving and expanding its direct-to-consumer business and expanding in international markets.

Branching further into B2C

Right now, Fair Isaac has a substantial and long-standing business-to-business (B2B) business, providing FICO scores to companies, including banks, retailers, credit card companies, car companies, etc. However, the true market for growth lies in the business-to-consumer (B2C) field, where Fair Isaac has just begun to ramp up its business and product offerings. Currently, consumers can monitor their credit scores and receive instant alerts using myFICO, a service offered to consumers by the company. Using myFICO, consumers can keep a close eye on their credit scores and help prevent and detect fraud and identity theft. This is an extremely useful tool to consumers and is gaining traction.

With the right set of offerings and marketing to consumers, Fair Isaac can capture a much bigger piece of this market. Consumer scores must be a focus area of growth for this business moving forward. They remain a relatively green field for expansion, as well as offering most attractive margins.

Penetrating international markets

The international marketplace is also important to Fair Isaac's growth story. Thus far, the company has only enjoyed tremendous success in the United States. Now the test to growth will be whether it can duplicate that success in a range of international markets - especially sophisticated and well-banked economies, such as those in the European Union.

It is not as if Fair Isaac has done nothing to penetrate the international market thus far. Indeed, some international revenue is coming in already. For instance, almost half of Fair Isaac's revenue from its software business comes from outside the United States. That is very significant. Unfortunately, the company's scores business - the one with the greatest growth potential - is not internationally focused or successful.

If Fair Isaac can encourage international businesses and consumers to expand their usage of the FICO score, and work to make it as crucial as it is to American consumer markets, then the growth potential is massive. Both the B2B and B2C markets are ripe for the taking.

Threat to the growth story

Despite Fair Isaac's success and clear paths for expansion, outside factors could derail its growth story. One such event could be a weakening of the U.S. economy and even a recession. Due to rising interest rates and uncertainty, the U.S. economy could face a significant pullback or adjustment. If such an event were to be serious, Fair Isaac might experience lagging growth as customers (most businesses, but also consumers seeking credit) would face declining business and interest.

We see this as the only major theoretical threat, although the risk of a major data breach at a credit agency might also damage the company. If such an event were to occur, the integrity of the entire credit business might come into question.


Fair Isaac is currently trading at about 25 times expected earnings for 2018. All things considered, that's not a bad multiple given the robustness of Fair Isaac's track record of continual success and the current state of the stock market. It might be a little rich for a hardcore value player, but many value-oriented investors might still see a bargain given the ready growth opportunities in the quarters and years ahead.

We believe the company is not overpriced and its stock should rise given a strengthened U.S. economy. No doubt, outside concerns could derail this prediction, but we believe Fair Isaac has significant upside potential.

Disclosure: I/We own no stocks discussed in this article.

This article first appeared on GuruFocus.