On October 4, 2023, Fair Isaac Corp (FICO, Financial) registered a day's gain of 1.15%, with a 3-month gain of 5.23%. The company's Earnings Per Share (EPS) (EPS) stood at 16.47. Despite these positive metrics, is the stock modestly overvalued? This article provides an in-depth analysis of Fair Isaac's valuation, encouraging readers to delve into the following sections for a comprehensive understanding.
A Brief Overview of Fair Isaac Corp (FICO, Financial)
Established in 1956, Fair Isaac Corp is a leading applied analytics company, primarily known for its FICO credit scores. These scores serve as an industry benchmark to determine an individual consumer's creditworthiness. The firm's credit scores business accounts for most of the firm's profits and includes business-to-business and business-to-consumer offerings. Additionally, Fair Isaac sells software primarily to financial institutions for analytics, decision-making, customer workflows, and fraud prevention.
Currently, Fair Isaac's stock price stands at $846.17, with a market cap of $21 billion. However, the GF Value, an estimation of fair value, is $651.66. This disparity paves the way for a deeper exploration of the company's value.
Understanding the GF Value
The GF Value is a proprietary measure of a stock's intrinsic value, computed considering historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line denotes the stock's ideal fair trading value. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
According to GuruFocus Value calculation, Fair Isaac (FICO, Financial) is estimated to be modestly overvalued. This suggests that the long-term return of its stock is likely to be lower than its business growth.
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Evaluating Fair Isaac's Financial Strength
Companies with poor financial strength pose a high risk of permanent capital loss. To avoid this, investors must review a company's financial strength before deciding to purchase shares. The cash-to-debt ratio and interest coverage of a company are key indicators of its financial strength. Fair Isaac has a cash-to-debt ratio of 0.08, which ranks worse than 93.46% of 2721 companies in the Software industry. The overall financial strength of Fair Isaac is 4 out of 10, indicating that its financial strength is poor.
Profitability and Growth of Fair Isaac
Investing in profitable companies, especially those with consistent profitability over the long term, is less risky. A company with high profit margins is usually a safer investment than those with low profit margins. Fair Isaac has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $1.50 billion and an Earnings Per Share (EPS) of $16.47. Its operating margin is 41.38%, which ranks better than 97.97% of 2756 companies in the Software industry. Overall, the profitability of Fair Isaac is ranked 10 out of 10, indicating strong profitability.
Growth is an important factor in the valuation of a company. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth rate of Fair Isaac is10.9%, which ranks better than 56.92% of 2398 companies in the Software industry. The 3-year average EBITDA growth rate is 30.9%, which ranks better than 78.36% of 1987 companies in the Software industry.
Return on Invested Capital (ROIC) vs. Weighted Average Cost of Capital (WACC)
One can also evaluate a company's profitability by comparing its return on invested capital (ROIC) to its weighted average cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the return on invested capital exceeds the weighted average cost of capital, the company is likely creating value for its shareholders. During the past 12 months, Fair Isaac's ROIC is 37.35 while its WACC came in at 11.78.
Conclusion
In conclusion, the stock of Fair Isaac (FICO, Financial) is estimated to be modestly overvalued. The company's financial condition is poor, but its profitability is strong. Its growth ranks better than 78.36% of 1987 companies in the Software industry. To learn more about Fair Isaac stock, you can check out its 30-Year Financials here.
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