FICOBanner, Link to the Real

APRIL 8, 2020



“Market timing”

is often a derisive expression. But then did anyone predict Monday? Why mention this? Because savvy investing exists in between. Because Fair Isaac is a financial. Because financials are hated and poisonous now, right? FICO produced the 5TH highest return out of the 23 financials we track during Monday’s spectacular blow-out run. Is up 14.12% good?

FICO is much more than your credit score. The financial sector is a down-trodden wreck, so why talk that mess? “Payment holidays,” for one. This goddamn virus has created an economy-wide financial crisis. Face-to-face business has ceased and customer service is in overload. A month’s worth of customer service now occurs everyday. That’s business for FICO. Customer service?

Proper diversification calls for exposure to the financials. Yet banks are squashed. What’s left? Financial infrastructure. That’s why we’ve been thinking “FICO. STILL SCORING.”




cafe, city, street
Summer’s right around the corner. Summer will look and feel different this time.


are an epidemic unto themselves.  They are crushing incomes across entire industries.  America’s now a nation of closed restaurants, bars, parks, movies, sports, and everything else conducted face-to-face.  No one’s simply walking through that.  Have you ever seen travel flash frozen?  Customers are scrambling to customer service, now, with unresolved account issues, many about to be rammed into delinquency, through no fault of their own.


Opposite that lies a customer service army, itself scrambled.  Try running a call center without people congregating.  Nearly all of what customer service handles involve financial decisions.  Think mortgages, and services, useless airline or event tickets.  That’s what Fair Issac or, FICO, does–financial decisions.



FICO doesn’t live off net interest margins(NIM) like the currently profit-strangled banks.  They also do much more than score our credit. How’s that been working out for them?  Their still up 9.3% over the past 12 months.  If you’d have owned FICO over the past three you’d be up 131.6%, and over five you’d be better off by 223.3%.


What else is FICO working on just now?  Wrap an arm around your gut for this:  “Equifax’s consumer data goes far beyond the credit files that are built by the three credit bureaus using information provided by financial institutions and includes things like the cellphone and utility records of 200 million Americans, payroll and employment information, and brokerage accounts details.”–“Banks want more consumer data.  Equifax and FICO are here to help.”  Ben Walsh, March 27, 2019. Barons.



Ultra-low interest rates mean lenders have no margin, thus no profit. That’s not vanishing anytime soon. Additionally, banks, real estate REITS, and other lenders, are facing loan losses as unemployment expands. Yet the financial sector is both the second largest and hyper-lucrative. What’s left? Financial infrastructure. FICO is one example. See, that guy’s thinking hard about it.


and other credit rating companies like Equifax are what we call financial infrastructure.  They provide information and services to banks, insurers, service providers, lenders and creditors of every kind.  Each has a consumer-facing business, yet FICO in particular does as much of it’s business with other businesses.  How is Fair Isaac benefiting now from the customer service crisis?  They streamline and even automate the process.  They’re offering increasingly AI-driven financial decision management in such things as payments and payment re-scheduling.


We  know Fair Isaac as FICO and their consumer-facing “myFICO” credit score offering.  But FICO mostly works behind the scenes by providing analytics and Decision Management Systems and services.  They offer pre-configured software packages that automate or streamline financial assessments and decision making.  Their products include both pre-configured applications, supporting services, and customizable software tools for more complex situations. They also traffic individual credit scoring business-to-business, thus allowing point-of-sale credit decisions.  Think store cards.  They also automate the process of generating those “pre-approved” card offers we receive.


Why talk financials at all now?  Because financials account for 17% of the S&P 500’s market capital, second only to tech’s approximately 23%.  Any properly diversified portfolio benefits, in the long run, from exposure to one of the most lucrative sectors in any economy, the financials.  Yet banks ultra-low interest rates have crippled the banking business.


Low rates won’t be headed up anytime soon.  Additionally, banks now face potential loan losses stemming from increasing job loss, and crazy-low oil prices.  Unemployment is now climbing and looks likely to reach an historic high, or worse.  However, infratructure players, FICO does not directly face low rates or loan losses.  In fact they benefit.



FICO, 4-7-20
The recent plunge violated the 2018 high set in September.  Current price-action matching the June 3rd Q3, 2019 level(SJChart.)


expected from FICO in 2020?  EPS is forecast to expand by 28.7%, from $6.34 a share up to $8.16.  A forward-rolling 12 month forecast is less thrilling at 8.7%, yet the 3-5 year is an impressive 19%.  The Schwab Center for Financial Research sees revenue flattish for ’20.  And revenue over the longer haul?  CFRA sees a 3-year compound annual growth rate(CAGR) of 17%.  And the actual rate last year?  FICO posted a nice yoy revenue growth of 12% last year.


We lean toward CFRA’s analysis.  The Schwab metrics are a product of black box modeling–#s in #s out.  Black box modeling is quick, dirty, and helpful in general terms.  Yet, CFRA is an example of the active analysis we like.  CFRA provides extraordinary context, including historical.  We love that.


Fair Isaac’s margins are amazing at 70% gross.  Fact.  Most companies would live on their knees praying to Beelzebub for a ROE of 20, or even less.  What’s Fair Issac bringing to the mix?  A return on Equity(ROE) of 88.3, vs. it’s S&P benchmark’s 15. Keep in mind that return on equity is Warren’s favorite growth metric.



CFRA sees three key revenue drivers for FICO here.  The company’s cognitive computing, or machine learning.  FICO’s continuing to build on it’s AI-driven platforms used in both it’s Applications and Decision Making Systems segments.  Their software product offerings are adding value to customers in the form of automation and better predictive results across more varied case uses.  That’s how the company’s streamlining and speeding it’s clients customer service bottleneck now.


Secondly, FICO’s benefiting from more people actively  managing their credit score.  It matters and people are learning that.  Additionally, the company is entering previously unpenetrated, non-U.S., markets, or green field markets.  Scores is the company’s most well known segment, and their strongest business currently.  It’s posted 20-25% annual returns over the past several years and comprises 38% of current revenue.  A third driver is the company’s recently launched cloud-based versions of their applications.   The cloud-based versions are more affordable, thus bringing a greater number of businesses on-board.




Thinking ahead. The financials are too big to ignore, and banks to hamstrung to buy here. The financial system has a lot of players. The good ones will be there over time. And when rates rise again, and work resumes in person, FICO will be there. How expensive will they be then?


sees continued strong EPS of $11.18 in the out years–2021.  That’s valuable continued growth year-over-year.  Will banks see that EPS expansion?  No, not as things look from here.  Yet execution risk is a question.  CFRA’s recent downgrade of FICO was driven by execution risk in both the Applications and the Decision Management Systems segments.


FICO is expensive, even now.  That’s another concern.  Yet nothing’s free, and FICO’s relative freedom from this painfully low interest rate environment and the loan losses lenders will suffer, are strong benefits.  Quality is worth paying up for.  We’re now seeing some selective strength in the financials.  Volatility seems unavoidable for some time.  Pull backs in share price will come.


Monday’s amazing run-up clearly displays the unpredictability of this market in particular.  That’s one reason we build our diversification over time, buying when prices are good, not when things are loved.  The old in-and-out scheme is a fool’s game.  Superior entry points come at a price.  What price?  Uncertainty.  By the time the market moves, it’s usually too late.  Prices have already moved on.  We feel FICO justifies both it’s segment execution risk, and a bit higher price.  Small, patient, buys when offered, we feel, are likely to pay back nicely in time.  Even with their concerns and current “HOLD” rating, CFRA still has a price target of $433.  That’s a long way from FICO’s current price of $297.59.  As always, good luck and good investing.



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