Refi market fueling Factual Data

LOVELAND — A year ago, Factual Data Corp. was ready to sell.

The Donnan family, which started Factual Data in 1985 and still owns one-third of the company’s stock, had agreed in May 2002 to merge with the larger Fidelity National Information Systems.

All signs pointed to a happy marriage. The Donnans would continue to run Factual Data as a subsidiary of Fidelity. The business would stay in Loveland and grow with the help of Fidelity’s deep pockets.

Then in late August 2002 the deal was called off.

The news was brutal on Factual Data’s shareholders.

Factual Data stock fell 44 percent on Aug. 30, the day the news hit Wall Street. That day’s closing price of $5.88 remains a 52-week low for Factual Data shares.

A year later, neither side is discussing the break-up, or who walked away from whom. But history has looked kindly on Factual Data.

“It’s been the right decision,´ said Factual Data chairman Jerry Donnan. “We don’t have any bad feelings about that merger going away.”

Donnan’s reasons are easily explained.

The company, which specializes in Internet-based credit reporting for the mortgage industry, finished 2002 with a record profit — $6.5 million — and revenues — $63.1 million.

Thanks to a continuing surge in home buying and refinancing, Factual Data’s on pace for another record year in 2003. Analysts are projecting profits of up to $1.51 per share, or $9.06 million.

Now investors are recognizing the results.

Since the first of the year, when Factual Data shares were priced at $7.50 each, stock value had increased 123 percent to $16.71 as of June 6. Factual Data shares hit an all-time of $17.78 June 2 before rolling back, apparently due to a profit-taking sell-off by some institutional investors.

Nevertheless, the failed merger has been a monumental turning point for Factual Data.

“It comes down to quality management and the fantastic market they are in,´ said Gordon McBean, a research analyst who follows the credit-reporting industry for Roth Capital Partners.

Factual Data has made hay from historically low interest rates, which dipped to 5.26 percent last week for 30-year fixed mortgages and 3.59 percent for short-term adjustable rate mortgages.

The low rates are motivating hordes of existing homeowners to refinance, as well as helping many others to qualify for home loans. The more mortgage transactions, the more calls coming into Factual Data for credit checks, which represents two-thirds of the company’s business.

The mortgage market isn’t likely to tail off soon. A new report from Bear Stearns shows that 95 percent of current mortgage borrowers “have a significant incentive” to refinance based on current interest rates.

Such a forecast adds up to high hopes for Factual Data.

“The longer this mortgage market stays strong, the stronger they get financially,” McBean said.

In turn, Factual Data can use its stronger balance sheet to diversify into non-mortgage markets, such as consumer-loan credit reporting, employee background checks and renter background checks.

“That probably means a better (price-to-earnings) multiple will be applied (to Factual Data stock) with a more diversified, less cyclical business,” McBean said.

Analysts expect Factual Data to use some of its newfound stock value to start buying up smaller rivals. Factual Data made a steady diet of gobbling up small credit bureaus between 1998 and 2002, with more than 30 acquisitions in that time.

The buying habit cooled after the merger proposal with Fidelity was announced last May, but could be renewed soon.

“We haven’t changed our long-range plans to continue to do acquisitions in the field,” Donnan said. “We still only have a small percentage of market share today. The market is still owned by many independents out there.”

The top five mortgage-credit-reporting companies claim about 40 percent of the overall market. Donnan estimates Factual Data’s market share “between 12 and 18 percent,” making it the second-largest in the industry. “We want to be No. 1,” he said. “I think we can take the No. 1 spot sometime this year.”

Meanwhile, the company seems to be getting rewarded for many years of quiet profit.

“Every time it posted another quarter, I would shake my head and say, ?I don’t understand why the stock doesn’t move up,’´ said Dave Lavigne, principal for EdgeWater Research in Denver.

Investors were probably skeptical about the ability of the mortgage market to maintain strength, and saw that Factual Data was heavily reliant on the mortgage business.

“I think a lot of people were waiting for the mortgage shoe to drop,” Lavigne said. “It never seemed to happen. In the meantime, they sit and make more money and more money. Sometimes people finally get it.”

At Factual Data, the getting is good.

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