Fair Isaac Co. (FICO, Financial) experienced a significant decline in its stock, falling 8.11% following discussions about potential changes in credit scoring systems. The drop contrasts sharply with the broader market, where the S&P 500 index saw a modest decrease of 0.4%. The current price for FICO stands at $2,027.
At the Mortgage Bankers Association conference, Federal Housing Finance Agency (FHFA) Director Bill Pulte discussed a potential shift from the "tri-merge" credit scoring system, which currently utilizes data from Experian, TransUnion, and Equifax, to a "bi-merge" system based on data from just two credit bureaus. This proposed change could impact Fair Isaac's business given its reliance on credit score analytics arising from this system.
Additionally, discussions about the privatization or restructuring of government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac were highlighted. These potential changes could reduce government involvement and increase competition from other businesses in providing credit scores, potentially impacting Fair Isaac's market share.
Fair Isaac Corporation is renowned for its FICO credit scores, a benchmark in assessing consumer creditworthiness, and primarily derives its revenue from this service in the United States. Beyond credit scoring, FICO provides software solutions to financial institutions for decision-making, analytics, and fraud prevention.
In terms of valuation, FICO's current price of $2,027 is well above its GF Value estimate of $1,313.45, indicating that the stock is significantly overvalued. The company's Price-to-Earnings (P/E) ratio stands at 87.3, which is relatively high compared to the industry median of 26.1, potentially signaling a premium valuation.
Financially, FICO shows robustness, as reflected by its strong Altman Z-Score of 16.82, suggesting low bankruptcy risk, and a high Piotroski F-Score of 8, indicating financial health. Yet, the company has been issuing new debt, with $720.65 million over the past three years, though this level is deemed manageable.
Despite the recent insider selling activity, with 22,906 shares sold in the past three months, the overall investment case for FICO appears solid due to its consistent revenue and earnings growth, bolstered by an expanding operating margin. However, stakeholders should be cognizant of the high valuation and potential regulatory changes impacting credit scoring practices.
