Despite the rise of the stock market this year, the demand for financial information seems to be stalled, and the latest earnings report from FactSet Research Systems Inc. (NYSE:FDS) has confirmed this statement. The provider of financial information for portfolio managers and research professionals has reported that its revenue has grown a modest 6% year-over-year, while its earnings grew 10%. The company’s stock is up 13% this year, but it has lacked direction for a long period of time and has been trading back and forth in a range. Is there enough momentum to push the stock to new heights?
FactSet Research Systems Inc. (NYSE:FDS) clients can be divided into two groups: buy-side and sell-side. The buy-side represents funds that manage their portfolios, while the sell-side represents brokers who produce research for their clients. FactSet states that buy-side clients have been adding users in the last quarter, while sell-side clients, particularly equity research clients, have been reducing their users.
The outlook for the growth of financial information products remains foggy. Thomson Reuters Corporation (USA) (NYSE:TRI), which has financial information products among its offerings, has seen its financial & risk revenues drop 3% in the most recent quarter. Morningstar, Inc. (NASDAQ:MORN), who’s financial information products target a wider audience, has seen its revenue rise a modest 5% in the last quarter. These results are not particularly impressive.
Can FactSet grow?
What is the reason behind the lack of growth? FactSet Research Systems Inc. (NYSE:FDS)’s products are expensive. In fact, when reporting clients, FactSet does not include clients that pay less than $24,000 a year. Companies in all industries are getting increasingly worried about costs. This year is the first year out of five when the equity funds get a net inflow of money, so it’s no wonder they are cautious about paying. Retail investors are still in doubt about the market prospects. The financial crisis has done its damage, and while the S&P 500 has reached pre-crisis levels, the confidence of retail investors has not.
What must happen for this trend to change? First, we need to see more inflow into equity funds. This would boost the need for in-house research. Retail investor confidence must improve to increase the need for sell-side research. For FactSet Research Systems Inc. (NYSE:FDS), buy-side clients are more important because they bring 83% of total revenues. The improvements on this front would also benefit Thomson Reuters Corporation (USA) (NYSE:TRI). Morningstar, Inc. (NASDAQ:MORN) needs the return of the retail investor.
FactSet Research Systems Inc. (NYSE:FDS) has a very high retention rate of 92%. Clients stay with the company. There are two main reasons for this. First, FactSet’s products, as well as other financial information products, are complex enough. It means that switching is not easy. The second reason is that FactSet offers good quality and its users are satisfied.
The company has increased its dividend from $0.31 to $0.35 per share. At current prices, it yields 1.42%. The company has also increased its share repurchase program, with $206 million authorized for share repurchases.