Analysts snub Fair Isaac

With its shares down 56 percent from their peak in 2005, Minneapolis-based analytics company Fair Isaac Corp. hopes a major restructuring will improve its score.

For multiple quarters, the company, best known for its FICO credit score, has failed to grow revenue. In March, it said it will sell nonstrategic and unprofitable businesses and shed jobs to focus on growth in the areas of software and tools for retail, insurance, health care and the beleaguered financial sector.

But financial clients such as banks and consumer finance creditors represent as much as 75 percent of Fair Isaac's current revenue. And many of those companies are struggling to cope with the impact of bad loans. So it's unlikely that Fair Isaac will turn around its performance until its financial clients do.

Without a growth story, analysts lose interest

As a result, fewer and fewer sell-side analysts -- those who work for retail brokerages and stock underwriters -- are sticking around to see when that will happen. In October, 11 analysts were covering Fair Isaac. That number has since dropped to six, according to Bloomberg News.

"Unless it's a growth story, it's hard to get people excited," said Kevane Wong, an analyst with JMP Securities.

Fair Isaac -- with $822 million in 2007 revenue (down a bit from $825 million a year earlier) and market capitalization of about $1 billion -- was one of a dozen companies demoted last week from the Russell 1000 large-cap index to its small-cap index.

Wong covered Fair Isaac until March, when he was reassigned because the company wasn't generating the trading volume or banking deals needed to justify Wong's attention.

"The sell-side is built for momentum investors," explained Wong. "You'll see a lot more people covering larger stuff that's liquid ... stocks that have potential deals in their space," he said.

Although it is no longer a favorite son, Fair Isaac is by no means an "orphan stock.'' Companies that aren't followed by analysts are called orphans, because there is so little interest in them that analysts bail out and abandon coverage altogether.

Hawkins, Delphax, Hickory Tech are 'orphans'

Among Minnesota companies, Hawkins Inc., a laboratory chemicals maker; Delphax Technologies, a document production company; and telecommunications provider Hickory Tech Corp. have no analyst coverage, according to Bloomberg.

Others, including restaurant chain Buca and Canterbury Park Holdings, have just one analyst covering them.

Why do companies care if Wall Street's watching? Because a company's stock "is a form of currency," explained Tony Carideo, a Minneapolis-based investment consultant who is hired to drum up interest in companies.

"The more analyst estimates there are out there, the more effectively the market can assess the true value of a stock," he said.

After the dot-com boom-and-bust, which was fueled in part by rosy coverage from analysts who were too close to the companies they covered, reforms were put in place that heavily regulate analysts.

Sell-side research isn't a growth industry

Since then, "the future of sell-side research remains bleak amid enormous pressure from the tough economics of the research business, bolstering of internal research by buy-side firms, and independent research providers knocking hard on the buy-side door," Dushyant Shahrawat wrote in a 2007 TowerGroup report.

Buy-side analysts work for investment companies such as Fidelity or Ameriprise that have invested in the stock.

Upheaval in the analyst industry, not Fair Isaac's performance, is the root cause of fewer analysts covering it, said Michael Nemeroff, who watches Fair Isaac for Wedbush Morgan Securities.

With the bargain-priced purchase of Bear Stearns and layoffs up and down Wall Street, analysts "are getting the ax," he said. Or they are being redirected to higher-profile stocks that generate a lot of trading or have the potential for mergers or other deals.

Nemeroff has no plans to abandon Fair Isaac. "I like the company. I like the management team," he said, blaming much of the company's challenges on the ailing financial sector. Nemeroff currently has a "hold" recommendation on the stock, awaiting evidence that restructuring efforts are working and that its scoring business can handle the competition from VantageScore, a credit score developed by the three major credit bureaus that's gaining ground and forcing Fair Isaac to squeeze its profit margin.

Five of six Fair Isaac analysts agree: 'Hold'

Four other analysts have a "hold" on the stock, according to Bloomberg; one has a "sell" rating.

Nathaniel Otis, an analyst with Keefe, Bruyette and Woods, thinks that, because Fair Isaac could be classified as a tech stock, a credit-related stock or a data company, it "fall[s] into the cracks because it has no real industry." Despite its recent performance, Otis thinks Fair Isaac is a compelling company to watch.

"Your credit score and credit data is everywhere," he said. Credit scores are used not only by mortgage companies but also by employers, insurers and landlords to assess whether a customer is a good risk.

"Fair Isaac is at the heart of it," Otis said.

Kara McGuire • 612-673-7293