Regulatory, Industry Headwinds Pressuring FactSet's Revenue, Goldman Sachs Says In Downgrade

Revenue growth at FactSet Research Systems Inc. FDS could suffer due to secular challenges in the financial services end-market, as a result of tighter European Union rules and the ongoing shift from active to passive asset management, according to Goldman Sachs.

The Analyst

George Tong downgraded FactSet Research Systems from Neutral to Sell and reduced the price target from $253 to $246.

The Thesis

FactSet faces secular headwinds in its financial services end-market, with more stringent MiFID II regulatory and reporting requirements, stiffening competition and weakening client spending due to changes in the economics of asset managers, Tong said in a Wednesday downgrade note. (See his track record here.)

Lower client spending could adversely impact the company’s revenue growth, while increased competition would exert pressure on its margins, the analyst said.

An acceleration is underway in the pivot from active to passive asset management, with the percentage of domestic equity assets under passively management rising from 25% in 2009 to 37% in 2015 and to 47% in 2018, Tong said.

U.S. portfolio manager headcount growth also weakened from more than 6% between 1998-2008 to 3.4% on average since 2013, according to Goldman Sachs.

FactSet's revenue growth has structurally declined from 8-9% historically to 5-6% due to secular challenges and more competitive pricing dynamics, Tong said. The company would need to “reinvest meaningfully” in content and analytics to remain competitive, which could add to the pressure on its margins, he said.