Fair Isaac Corporation
Fair Isaac Corporation (NYSE: FICO) provides analytical software and data management solutions to businesses to help them automate, improve, and connect their decisions. The company operates in two divisions: Software segment containing decision management solutions built for a specific type of business processes such as account creation, customer management, fraud detection, and financial crime compliance. Scores include B2B scoring systems and services that provide clients with projected credit and other scores.
Why Should Investors Book Profit?
- Stretched Balance Sheet: The company concluded the Q1FY22 with USD 196.08 million in cash (including short-term investments) and total debt of USD 1.63 billion. Furthermore, its %Long Term Debt to Total Capital ratio was 143.2%, compared to the industry norm of 14.3% for a similar period. These overly leveraged financials put the company at the brink of wild swings on the slightest interest rate movement.
- High Cash Conversion Days: Compared to the industry, the company has a long Cash Conversion Cycle (Days), meaning that it takes more days to convert its sales to cash. As of Q1FY22, its Cash Cycle was 58.7 days, compared to an industry median of 20.3 days.
- Weak Liquidity Profile: The company's current ratio in Q1FY22 is 0.83x, compared to the industry median of 1.85x. These lower ratios in comparison to the industry suggest that the company's short-term obligations are expanding faster than its resources to fulfil them, which is not a good sign.
- Weak Technical: FICO's stock price continues to rise and remains above the rising trend line. On the weekly chart, however, the stock is coming against stiff resistance at the 50 DMA, and profit-taking might push the price lower. The daily RSI (14-period) momentum oscillator is 68.46, indicating that the stock is approaching overbought territory.
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation
(Analysis by Kalkine Group)
* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.
Stock Recommendation:
FICO's share price has surged 21.16% in the past three months and is currently leaning towards the mid-high band of the 52-week range of USD 342.89 to USD 553.97. We have valued the stock using the EV/EBITDA-based relative valuation methodology and arrived at a target price of USD 401.56. Considering the company's highly leveraged balance sheet, rising interest rates, weak liquidity profile, current valuation, and other resistance at the current levels, we recommend a "Sell" rating on the stock at the closing price of USD 493.12, up 16.58% as of January 28, 2022.
Three-Year Technical Price Chart (as of January 28, 2022). Analysis by Kalkine Group
* The reference data in this report has been partly sourced from REFINITIV.
* All forecasted figures and industry information have been taken from REFINITIV.
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