FICO: Pricing Power, Double-Digit Organic Growth, High Margins

Sahm Adrangi and Jordon Giancoli of Kerrisdale Capital Management presented their investment thesis on FICO (US: FICO) at Best Ideas 2022.

Thesis summary:

FICO is a high-quality software business trading well below intrinsic value after accounting noise and misunderstood headline risks drove a 25% contraction in its share price since the summer of 2021.

FICO’s Scores business sells the ubiquitous FICO Score, with decades of brand equity and modeling expertise leading to 90% market share of the U.S. consumer underwriting market. Steady 3-6% growth in credit markets are boosted by FICO price increases that should result in 15%+ organic Scores growth and 80% EBIT margins for the next several years.

This highly profitable Scores business has been clouded by a low-margin software division undergoing a slew of changes, including a transformation of the product platform, several non-core divestitures, and a shift in sales incentives from upfront to recurring contracts. These changes depressed FICO’s consolidated growth in 2021 and led to messy quarterly disclosures.

An ongoing transformation of the software business came in conjunction with a widely publicized customer loss to FICO’s only competitor, VantageScore. We think Vantage only poses a risk to the under-banked subprime market, a space where FICO’s Scores business has a limited presence.

As the market regains its conviction in FICO Score’s pricing power, double-digit organic growth, and 85% incremental margins, while the Software business completes its transformation into a recurring platform model, Sahm and Jordon see 30%+ upside in FICO shares over the next year.

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About the instructors:

Sahm Adrangi is the chief investment officer of Kerrisdale Capital Management, a private investment manager that focuses on value and special situations investments. Prior to founding Kerrisdale Capital Management, Sahm was an investment analyst at Longacre Fund Management, a distressed debt credit fund. Prior to Longacre, Sahm worked in the bankruptcy restructuring group at Chanin Capital Partners and the leveraged finance group of Deutsche Bank Securities. Sahm holds a Bachelor of Arts in Economics from Yale University.

Jordon Giancoli is a Partner and Director of Research at Kerrisdale Capital Management, an investment firm. Prior to joining Kerrisdale Capital Management, Jordon was a Senior Analyst and Director at Carlson Capital, a multi-strategy investment firm. Prior to this, Jordon was a Senior Associate at Ondra Partners, an M&A advisory boutique, and an Analyst at the Mergers & Acquisitions group at HSBC Securities.