Moody’s Corp. (NYSE: MCO)’s is a large-cap financial services company focusing on credit ratings and risk management and analytics. The company has an impressive track record, with historical compound annual growth rates for sales and EPS in the low double-digit range. We expect Moody’s to benefit over the long run from the secular trends of global GDP growth and debt market disintermediation. Management also has opportunities to develop new products and raise margins, and to expand through targeted acquisitions. Management recently navigated through a legal issue involving the company’s performance during the financial crisis.
The beta on MCO is 1.12.
Revenue rose a 9% year-over-year to $1.4 billion. It now expects adjusted EPS of $9.95-$10.15, up from a prior $8.80-$9.20.
EARNINGS & GROWTH ANALYSIS
Moody’s Corp. has two operating segments: Moody’s Investor Service (MIS) and Moody’s Analytics (MA). MA provides research and financial risk management for institutions; it accounted for 43% of 3Q revenue.
In the latest quarter, MIS revenue rose 11%. Corporate finance revenue rose 18%, driven by both strong U.S. speculative grade issuance due to favorable credit market conditions. Financial institution revenue rose 12% as banks continued to solidify their capital bases. Public, project and infrastructure finance revenue was up 11% from the prior-year period. Structured finance revenue declined 16% due to economic uncertainty.
Segment revenue was once again driven by the research, data & analytics business (RDA), with 12% pro forma growth that reflected demand for compliance solutions and ratings data feeds.
Above management’s target of 46%-48%. The company is taking steps to lower costs by $40-$50 million over the next year.
FINANCIAL STRENGTH & DIVIDEND
Moody’s pays a dividend. In January 2020, the company raised the payout by 12%.
MANAGEMENT & RISKS
Moody’s is preparing for a management transition. The longtime CEO of Moody’s, Raymond McDaniel, is retiring and will become non-executive Chairman of the company on January 1, 2021. Ron Fauber, the current COO, will become the new CEO. The company recently appointed a new CFO Mark Kaye. Mr. Kaye joined Moody’s from Massachusetts Mutual Life Insurance Company, where he served as senior vice president and head of Financial Planning and Analysis, as well as chief financial officer of MassMutual U.S.
Moody’s is positioned to benefit from long-term secular trends such as global GDP growth and the disintermediation of credit markets in developed and emerging economies. The company continues to pursue targeted acquisitions and sees the opportunity for operating margin expansion. Share buybacks are also expected to boost EPS.
Investors in Moody’s face numerous risks. The ratings industry may be affected by a slowing economy or by rising interest rates, both of which could reduce demand for corporate debt and ratings. The industry is also competitive.
On January 13, 2017, it reached a settlement with the U.S. Department of Justice, 21 U.S. Moody’s agreed to pay a total of $864 million; the agreement did not state that the company had violated the law. The episode was reminiscent of the $1.375 billion settlement that S&P reached with the government in 2015.
The company is also subject to regulatory oversight in Europe.
A large-cap financial services company, Moody’s provides credit ratings on 11,000 corporate issuers and 18,000 public finance issuers in 120 countries. The company has 11,300 employees.
These companies trade at an average of 30-times projected 2021 EPS, with a range of 25-40. However, we believe this is warranted given the company’s record of high profitability and consistent growth. Our dividend discount model renders a fair value of $350 per share.