BARRA New Industry Standard

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By David Langford
December 20, 2000


Ticker: Nasdaq: BARZ
Phone: (510) 649-4546
Price (12/20/00): $44.50

How Did It Double?

Investment analytical products company BARRA Inc. (Nasdaq: BARZ) really started taking off this year as its TotalRisk system began to sell to European customers over the summer, convincing investors that BARRA really was being accepted globally as the last word in risk management. A sharply dropping market, complete with numerous "fake bottoms," punctuated the need for better risk management, throwing a klieg light on the company, particularly for institutional investors.

The company hasn't stopped rising since, and with BARRA unlocking the value of its core products through several secondary businesses this year shareholders have benefited steadily over the last 12 months.

Business Description

Investing, properly understood, takes place wholly within the rigid framework of risk management. BARRA's first product for measuring the risk of U.S. portfolios was introduced in 1975. Since that time, the company has expanded its offerings to include many other countries and investment possibilities. Moreover, BARRA has refined modern risk theory to unprecedented -- and unparalleled -- precision, particularly as it applies to various facets of investing in the real world.

Today, BARRA offers the planet's most accurate tools for measuring risk, and therefore gives those who subscribe the best tools for managing risk -- applicable to any combination of financial instruments. The importance of those tools is difficult to overstate to its customer institutions and, more broadly, to the progress of the world economy.

BARRA also leverages its core business through several new business ventures. These new companies, which are run more or less independently of BARRA, use BARRA's data to create computerized trading systems, offer asset management services or strategic consulting, and more. BARRA will hold some of its offspring close to the vest, while others will be sold off when ripe: (Nasdaq: MLTX) recently bought BARRA's earnings estimate business.

More detail on BARRA's structure can be found on MarketGuide. For more on the importance and evolution of risk management, see Peter L. Bernstein's outstanding book, Against the Gods.

Financial Facts

Income Statement
12-month sales: $218.2 million
12-month income: $41.9 million*
12-month EPS: 1.90**
Profit Margin: 19.2
Market Cap: $665 million

*net income excludes one-time items in the fourth quarter
**EPS has been adjusted for the 3:2 split; ex-date 12/19/00

Balance Sheet:
Cash: $104.8 million
Current Assets: $156.0 million
Current Liabilities: $70.8 million
Long-term debt: $0

Price-to-earnings: 23.4
Price-to-sales: 3.0

How Could You Have Found This Double?

The company's been pulling strong for a while now -- at this time last year a look at the previous four years' revenues and earnings per share growth clearly indicated a company on its way up. The stock likewise exhibited strong momentum, tripling over the same period -- yet, on the whole, it's been a smooth ride: its Beta is only 0.55, compared to the industry average of 1.71.

BARRA has also appeared on the Foolish 8 stock screen for smaller-cap companies, which were examined in Industry Focus 2001. There was certainly enough data available to grab any investor's attention, and on closer inspection there's plenty to see. As BARRA continued to grow it offered new and superior products, expanding its risk assessment offerings from stocks and bonds into complex derivatives -- stuff no one else was succeeding at doing like BARRA was.

It is true that a bear market always punctuates the need for risk management, and the ongoing downturn in the markets might have led some investors on a search for businesses that stood to benefit directly. But BARRA's products have seen increasing demand for some time and the company seemed well on its way to becoming the industry standard. That was perhaps the biggest key to the company's success.

Where to From Here?

BARRA's products are good enough that any institution that doesn't have them is at a disadvantage relative to other institutions. This is because an institution that takes on more risk than it realizes -- or, conversely, less than it should -- can hurt returns either by suffering heavier losses or achieving lower gains than its goals mandate. A 50% loss requires a 100% gain to break even, so downdrafts can seriously impact performance by virtue of taking months or years longer to break even. BARRA's products help institutions discover ways of limiting their losses that are more efficient than the standard hedges, and helps them to know how to define sufficient risk so that returns don't disappoint, either.

As more banks, insurance companies, mutual funds, pension funds, funds-of-funds, university endowments, foundations, and miscellaneous institutions and qualified individuals discover what BARRA has to offer, the company stands to grow far larger than it already has, offering an increasing number of products, leveraging its data through ever more businesses, and flexing some pricing power muscle, besides. Its Symphony business, which by itself manages $5 billion in funds, is worth a fair chunk of BARRA's current price, and it is only one of BARRA's secondary businesses.

The same might be said of BARRA's POSIT trading system, which is enjoying increasing volume in the United States and in Europe. Looking at it from another angle, BARRA's market cap is only three times that of Value Line (Nasdaq: VALU), even though BARRA is rapidly becoming indispensable, while Value Line, albeit a fixture, is becoming a nearly ornamental one. Sure, Value Line will be around as long as its Timeliness rankings still hold up, but BARRA's true value is a hundred times greater.

If the company keeps executing, it should continue to outperform. Investors appear to agree: BARRA's competition -- Advent Software (Nasdaq: ADVS),, eSpeed (Nasdaq: ESPD) and FactSet Research Systems (NYSE: FDS) are all doing worse as BARRA succeeds. No competitor offers everything BARRA does or is achieving the all-important default-setting status BARRA enjoys in the industry.

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