With a daily gain of 2.35% and an Earnings Per Share (EPS) (EPS) of 15, Fair Isaac Corp (FICO, Financial) is a stock that has piqued interest among investors. However, the critical question is, is the stock significantly overvalued? This article provides an in-depth valuation analysis to answer this question and guide your investment decisions. We encourage you to read on for more insights.
Introduction to Fair Isaac Corp (FICO, Financial)
Founded in 1956, Fair Isaac Corporation is a leading applied analytics company, primarily known for its FICO credit scores. This widely used industry benchmark determines the creditworthiness of an individual consumer. The firm's credit scores business accounts for most of the firm's profits, consisting of business-to-business and business-to-consumer offerings. In addition to scores, Fair Isaac also sells software primarily to financial institutions for analytics, decision-making, customer workflows, and fraud.
As of August 3, 2023, Fair Isaac (FICO, Financial) shares were traded at $841.54, significantly above the GF Value of $604.72, indicating an overvaluation. Let's delve deeper into the company's value, starting with an overview of its income breakdown:
Understanding the GF Value of Fair Isaac (FICO, Financial)
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.
For Fair Isaac, the GF Value suggests that the stock is significantly overvalued. This conclusion is based on historical multiples, the company's past business growth, and analyst estimates of future business performance. With a share price significantly above the GF Value Line, the long-term return of Fair Isaac's stock is likely to be much lower than its future business growth.
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Assessing the Financial Strength of Fair Isaac
Companies with poor financial strength pose a high risk of permanent capital loss. To avoid this, it's crucial to review a company's financial strength before investing. The cash-to-debt ratio and interest coverage are great ways to understand this. Fair Isaac has a cash-to-debt ratio of 0.07, which ranks worse than 94.45% of companies in the Software industry. The overall financial strength of Fair Isaac is 4 out of 10, indicating that it is poor.
Profitability and Growth of Fair Isaac
Investing in profitable companies carries less risk, especially those with consistent profitability over the long term. Fair Isaac has been profitable 10 years over the past 10 years, with revenues of $1.4 billion and an EPS of $15 in the past 12 months. Its operating margin of 40.27% is better than 97.75% of companies in the Software industry. Overall, GuruFocus ranks Fair Isaac's profitability as strong.
One of the most important factors in the valuation of a company is its growth. Companies that grow faster create more value for shareholders, especially if the growth is profitable. The average annual revenue growth of Fair Isaac is 10.9%, which ranks better than 57.27% of companies in the Software industry. The 3-year average EBITDA growth is 30.9%, which ranks better than 78.44% of companies in the Software industry.
ROIC vs WACC
Comparing a company's return on invested capital (ROIC) to the weighted average cost of capital (WACC) is another way to determine its profitability. ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Fair Isaac's ROIC is 34.98, and its WACC is 10.92.
Conclusion
In conclusion, the stock of Fair Isaac (FICO, Financial) appears to be significantly overvalued. The company's financial condition is poor, but its profitability is strong, and its growth ranks better than 78.44% of companies in the Software industry. For more details about Fair Isaac stock, check out its 30-Year Financials here.
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