FAIR ISAAC CORP (FICO) stock intrinsic value fair value estimate & owner earnings analysis

Fair Isaac sells the FICO Score, the three-digit credit score used by nearly every US lender, and a smaller decision-management software business. Scores are the engine. They were 59% of fiscal 2025 revenue and well over 80% of profit, and most of the growth comes from the fee charged per mortgage score, which the company has raised every year since 2018. In the quarter to June 2026, Scores revenue rose 41%, and the company said the rise came mainly from a higher mortgage-origination unit price. Software revenue rose only 2%, although platform subscriptions are growing quickly inside it. The three credit bureaus, Experian, TransUnion and Equifax, distribute the scores and supplied 51% of fiscal 2025 revenue, but they also jointly own VantageScore, the rival score. In July 2025 the regulator of Fannie Mae and Freddie Mac began letting mortgage lenders choose which score to deliver, so FICO's mortgage position now has to be defended rather than being required by rule. Earnings. Owner earnings are cash from operations after removing working-capital swings, stock compensation and the capital spending needed to keep the business running, including capitalised software. They rose from $95 million ($2.94 a share) in fiscal 2016 to $606 million ($24.66 a share) in fiscal 2025. Stock compensation of $157 million in fiscal 2025 is treated as a real cost. There is no material acquired-intangible amortisation, so no wasting asset is being treated as permanent. Because the company is heavily borrowed, we value the business before interest and then subtract the debt. On that basis, business cash flow was $503 million in fiscal 2023, $588 million in 2024 and $709 million in 2025. The first nine months of fiscal 2026 produced $837 million, a pace of about $1.1 billion a year. Three straight quarters at that level reflect the new mortgage price schedule, so we take the earning power of the business as it now stands at about $1.05 billion a year. We do not use a higher run rate, because part of the current pace reflects a recovering mortgage market. Owner earnings grew 26% in fiscal 2025 and are tracking about 50% higher in fiscal 2026. The base case assumes no growth in the coming year, because further mortgage price increases are now constrained by lender choice and regulatory scrutiny. Debt. Debt reached $5.58 billion at June 2026, against $248 million of cash. It rose from $3.1 billion a year earlier because borrowing funded $3.0 billion of buybacks in nine months, including $1.96 billion in the June quarter alone at an average price of $1,149 a share. Net debt is about $5.43 billion, or roughly $239 a share. Maturities: $900 million of 4% notes in June 2028, $1.5 billion of 6% notes in 2033, $1.0 billion of new notes due 2034 (issued in March 2026 to retire the 5.25% 2026 notes), and the remainder in bank revolver and term loans. The bank facility carries a maximum leverage covenant of 3.5 times. Overall the debt costs close to the market rate, so we make no adjustment for cheap or expensive debt. Base case. The business holds its mortgage role under lender choice, keeps about $1.05 billion of business cash flow next year, then grows about 3% a year. That growth reflects the eight-year record of annual price increases, held to an inflation-like pace rather than the recent double-digit steps. After year 10 growth slows to 2% for twenty years, then holds flat, because the score is built into lender underwriting, models and regulation, and that embedded position has persisted for more than thirty years. The business is worth about $24.4 billion. Less $5.4 billion of net debt, that leaves about $19.0 billion, or $836 a share. Bear case. This case combines the risks the filings name with a mortgage downturn of the 2008-2010 kind. First, lenders, encouraged by the bureaus' pricing, shift a large share of conforming mortgages to VantageScore. Second, regulatory or legislative pressure forces back part of the mortgage price increases taken since 2023. Third, mortgage originations fall about 40% from today's level, as they did from 2006 to 2008, and other lending slows with them. Business cash flow drops from about $1.0 billion to $750 million and then to a $560 million trough in year 3, recovers slowly to $700 million and stays flat from there. At the trough, debt would be close to nine times business cash flow and the bank covenant would be breached, so buybacks would stop and cash would go to repaying the banks. Interest of roughly $310 million would still be covered about 1.8 times. We add $500 million to the debt for the cost of refinancing the 2028 notes and the bank debt under stress. The business is worth about $11.7 billion against $5.9 billion owed, leaving about $5.7 billion, or $253 a share. Bull case. FICO keeps its mortgage position, its new direct licensing program for mortgage scores goes live (agreements already cover about 60% of mortgage volume and await sign-off from one of the mortgage agencies), and the record of pricing power continues. Business cash flow reaches about $1.1 billion next year and grows from 12% a year down to 4% over the decade, then 3% for twenty years. The business is worth about $39.8 billion. Less $5.4 billion of net debt, that leaves about $34.4 billion, or $1,515 a share. We did not credit growth in the software business, because a decade of low-single-digit growth does not support it. Margin-of-safety price. The earnings level itself is fairly certain: nine months of fiscal 2026 are actual cash. What is uncertain is how long the level lasts, because most of it rests on one price for one product, set in the shadow of one regulator and sold through three distributors who own the competing score. The worst plausible outcome is a forced cut in the mortgage score price together with a recession in mortgage lending. With more than $5 billion of borrowings, that would leave shareholders with a much smaller claim, roughly $250 a share, and lending covenants would take control of the cash. The business would survive it, because the debt is unsecured and interest would stay covered, but owners would get little while it played out. The things we are most likely to be wrong about are whether the pricing holds under lender choice and how much more the company borrows for buybacks. If pricing holds but growth slows to nothing, the shares are worth around $650. If borrowing keeps rising, every case falls. The company pays no dividend, so any return in the cases depends entirely on the business compounding and on debt being repaid. The margin-of-safety price is $370. From that price the base case implies about 20% a year over an assumed five-year holding period if cash flow goes to paying down debt. From that price the bear case implies a loss of about a third, not a wipe-out. Figures come from the annual reports for fiscal 2016 to 2025, quarterly data through June 2026, and the company's March 2026 notes announcement and July 2026 results release for the debt and segment facts. Our earlier estimates were built on a different basis and are not comparable with these.