March 15, 2020
A Dominant Credit Scoring Company
If you ever applied for a car loan, mortgage, or even just a credit card, you likely had to provide your FICO score to prove your creditworthiness to the lender. When you did this, the lender paid a credit reporting agency like Transunion (NYSE: TRU), Equifax (NYSE: EFX), or Experian (OTC: EXPGF) for your credit report. The agency, in turn, paid Fair Isaac Corp (NYSE: FICO) for your FICO score. Fair Isaac Corp is the creator of the FICO score and has a very dominant position in the credit scoring business.
In addition to FICO’s Scores line of business, they also have 2 other major operating segments – Applications and Decision Management Software. Each of these business segments grew their revenues in 2019 and in the most recent quarter.
With the recent “coronavirus” bear market that the stock market’s fallen into, FICO’s stock price, like many other companies, got pummeled. On Friday (March 13, 2020), the S&P 500 closed down 20.1% from its all-time highs. FICO closed 30.5% down from its all-time highs.
The bear market may last longer and FICO’s stock price may slide further. In the Great Recession of 2009, FICO dropped 79.9%. Even still, I think this is a good place to start a position in a great company.
Will people keep getting loans?
With the COVID-19 pandemic, the world economy may slow. In response, the Federal Reserve made its first emergency rate cut since 2008 (the Great Recession). Although people may spend less on things like travel and luxury goods, I don’t think that it will stop homeowners from refinancing nor people from getting loans and credit cards.
Because of this, FICO may be able to weather this storm fairly well. Speaking of the Great Recession, I always like to see how a company (and its stock price) did during those very trying times.
The following table and stock chart illustrates how FICO did during and after the Great Recession.
Although it took FICO 7 years to make a new EPS high, they never had negative earnings. Their earnings (and stock price) eventually reached new highs.
Transition to the Cloud
FICO is pursuing a cloud-first strategy. Cloud strategies have been very profitable for other companies such as Microsoft (NASDAQ: MSFT) and Salesforce (NYSE: CRM). FICO’s cloud strategy appears to be working. In their most recent quarter ended December 31, 2019, cloud revenues grew 16% to $73.7 million year-over-year.
Furthermore, Claus Moldt, former global chief information officer at Salesforce.com was promoted to CTO in 2019. I see this as a potential catalyst for the future growth of their cloud business.
FICO has a foothold in the credit scoring business. In the future, there may be increased government scrutiny of the FICO score. This could be a threat to their dominant position.
COVID-19 could cause a severe economic slowdown. This could mean a multi-year rough patch for FICO’s lines of business.
KEY STATS (AS OF MARCH 13, 2020)
Fair Isaac Corp is a very well run business with market dominance in credit scoring. They also have a thriving cloud software business. The company was able to weather the Great Recession. In the current bear market, their stock has fallen 30.5%. This could be a reasonable place to start a position.
I/we own shares of stock in FICO, TRU
Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies whose stocks are discussed in this article.
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Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.
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