What happened
Shares of FactSet Research Systems (FDS 2.43%) were down 10.7% in September, according to data provided by S&P Global Market Intelligence, with nearly the entire drop coming after the company reported quarterly earnings. The quarter was fine, but investors were disappointed by the financial-data provider's outlook for its new fiscal year.
So what
FactSet shares were flat for the month heading into the company's Sept. 26 earnings report. The company reported fiscal fourth-quarter earnings of $2.61 per share, easily besting the $2.47 consensus, but investors were more focused on FactSet's guidance for $9.85 per share to $10.15 per share in earnings in the new fiscal year. Analysts had been expecting full year earnings of $10.52 per share next year.
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At those levels, FactSet is basically projecting flat earnings-per-share growth in the new fiscal year. And the company also guided for slight operating margin contraction compared to the recently completed fiscal 2019.
FactSet earnings are slowing in part because the company is investing for the future. CEO Phil Snow said in a statement, "[W]e will be accelerating critical investments over the next three years from a position of strength, capitalizing on industry trends and enhancing our core offerings."
Snow said he expects the money spent today to pay off down the line. "We are making investments today so that FactSet can continue to deliver long-term value for all our stakeholders," he said.
Now what
In an age where access to data is increasingly affordable or even free, it's growing increasingly difficult for companies like FactSet, which offer more sophisticated information, to compete. It's great to see FactSet investing in its future, but those investments come at a steep price if they temporarily wipe out growth. And given the entire industry is investing and evolving, there's no guarantee FactSet will be able to bring down spending after this investment cycle is complete.
If we get a recession during the next few years, as many fear, FactSet's institutional customers could be forced to cut back. This would put further pressure on FactSet's growth and margins.
FactSet shares have had a good run, up more than 75% over the past three years heading into that earnings report. Given the company's outlook, FactSet now looks more like a show-me story than a buy.
