Information Services Group Inc. (III) stock intrinsic value fair value estimate & owner earnings analysis

Information Services Group (ISG) is a technology research and advisory firm. Large companies hire it to help buy and manage IT and business-process services: sourcing advisory (now run increasingly through its ISG Tango platform), supplier governance (the ISG GovernX platform), research subscriptions and provider ratings (ISG Research, ISG Provider Lens), events, and AI and software consulting. It reports as one segment. 2025 revenue was $244.7 million: $160.9 million from the Americas, which the company says is substantially all United States; $65.5 million from Europe, including $25.9 million from Germany and $14.7 million from the United Kingdom; and $18.3 million from Asia Pacific, including $15.4 million from Australia. The company says 46% of 2025 revenue was recurring. Its 25 largest clients made up about 30% of revenue in both 2025 and 2024. On October 1, 2024 it sold its Automation business to UST Global for $27 million. How we measured earnings. We use owner earnings: operating cash flow, less working-capital swings, less stock-based compensation, less the capital spending needed to maintain the business. Stock pay matters here. It was $7.8 million in 2025, close to the $9.3 million of net income, so we treat it as a real cost. We also charge bad-debt provisions against earnings rather than adding them back. That mostly affects 2023, when the company booked a $5.4 million credit-loss provision. Capital spending is small, $2-4 million a year. Amortization of acquired intangibles is added back, but it is now only about $1.3 million a year, so it does not flatter the result. Per diluted share, owner earnings were: 2018 $0.22, 2019 $0.21, 2020 $0.19, 2021 $0.37, 2022 $0.46, 2023 $0.15, 2024 -$0.04 and 2025 $0.19. 2024 includes $2.9 million of costs tied to the Automation sale. The $4.5 million gain on that sale is excluded. We anchor on the 2018-2025 median of about $0.20 per share, roughly $10 million a year on about 50 million diluted shares. That window covers a full demand cycle: the 2020 slowdown, the 2021-2022 boom and the 2023-2024 pullback. The 2025 figure of $0.19 was the first full year without the Automation business and sits right on the anchor, so the sale does not appear to have changed the earnings base much. Operating cash flow swings a lot from year to year: $44.0 million in 2020 but $11.1 million in 2022. Nearly all of that is the timing of receivables and accrued liabilities, which we remove. What the record shows. Over eight years, ISG has not grown earnings per share. Revenue was $275.8 million in 2018, peaked at $291.1 million in 2023, and was $244.7 million in 2025 after the divestiture. The share count has stayed near 50 million because buybacks have offset stock issued to employees. In 2025 the company paid $9.2 million in dividends and spent $9.3 million on buybacks. Together that is well above the year's owner earnings of $9.7 million. Borrowings are a $59.2 million revolving credit facility due February 22, 2028, against $23.7 million of cash at June 30, 2026. Recent results are firmer. First-half 2026 revenue rose 4.6% to $126.7 million, and net income rose to $6.0 million from $3.7 million. First-half operating cash flow fell to $4.5 million from $12.9 million. That follows a 2025 in which accrued liabilities rose $7.8 million and flattered cash flow, so we read it as timing, not a loss of earning power. Base case ($2.81 per share). Owner earnings last year went from a loss in 2024 to $0.19, a jump distorted by the sale costs; against 2023's $0.15, that is about 13% a year. We assume only 4% growth in each of the next three years. Support for that comes from the first-half 2026 revenue and profit gains and from recurring research and governance revenue. After that, earnings stay flat through year 10, consistent with eight years of no per-share growth. The advisory franchise and its benchmarking data have supported roughly this level of earnings for well over a decade. We carry it flat to year 20, then fade it to zero by year 30. Bear case ($1.18). Earnings restart from the 2023 level of $0.15 and shrink 3% a year for ten years. That reflects a repeat of the 2023-2024 pullback, when longer client decision cycles and cautious spending cut revenue 15% in a year. It also allows for the loss of work from some of the 25 largest clients and a slow revenue decline like 2018-2025. After year 10 earnings fade to zero by year 20. In this case the dividend is not covered, and the 2028 revolver must be refinanced with no earnings growth behind it. That is the main balance-sheet risk. The debt is modest next to the business, so this case still leaves positive value. Bull case ($4.57). The AI advisory work, which the company says rose from about 10% to about 30% of revenue in 2025, and the recurring research and platform businesses keep growing. Owner earnings grow 10% a year for five years to about $0.32, then 3% a year to about $0.37 by year 10. That is the level the business actually earned in 2021 and below 2022's $0.46. Earnings then stay flat to year 25 and fade out by year 35. What could make this wrong. Consulting demand is cyclical, and the thin margin means small revenue changes swing earnings sharply, as 2023-2024 showed. Stock compensation takes a large share of pre-SBC cash flow, so any rise in it cuts owner earnings one for one. On the other side, the 2021-2022 results show this business can earn more than twice our anchor when demand is strong. All values use a 6% discount rate with no adjustment for net debt, because owner earnings are already after interest. The margin-of-safety price is about $1.65, roughly 40% below the base case. That margin allows for a cyclical, people-based business with no demonstrated per-share growth, and at that price the recent dividend represents a yield of more than 11%.