Moody's (MCO) is one of the biggest companies in the financial services industry with a market cap of over $86 billion.
It is best known for its credit ratings business, where it competes with Fitch and S&P Global. The company provides ratings for companies and governments issuing debt in this business
Moody's has expanded its business to include solutions like research, insights, and data and information.
Moody's has ratings for over 14,000 companies and 160 countries. Altogether, its total rated debt outstanding has risen to over $74 trillion, a number that will keep growing as interest rates fall.
Moody's, which counts Warren Buffett as an investor, has done well over the years as its stock has jumped by over 406% in the last decade.
The stock was trading at $474 on Friday as its positive hype jumped by 114%.
Positive hype
Moody's is a leading company that operates as an oligopoly, where its primary competitors are companies like Fitch and S&P Global. Its industry is very difficult to get in.
Moody's annual revenue has been growing in the past few years, moving from $4.8 billion in 2018 to $5.9 billion last year. It is a high margin -ompany with a gross margin of 73% and a net profit figure of 28%.
The company’s revenue and profitability growth is continuing. Its forward revenue growth stands at 10% while the EBIT growth is 17%. These numbers are much better than those of the most popular tech names like DocuSign and PayPal.
Moody's will likely benefit from the ongoing interest rate cuts that will lead to higher debt issuance by companies and governments.
Analysts expect that its business will continue doing well, with its revenue expected to come in at $6.7 billion this year, a 14.6% increase from last year.
Moody's stock has remained above all moving averages, meaning that bulls are in control.
The other thing is that it is one of the biggest holdings by Warren Buffett, one of the most respected investors.
Moody's has a strong balance sheet with just $6.2 billion in debt and $2.6 billion in cash. This balance sheet means that it can fund acquisitions well.
Moody's has been reducing the number of its outstanding shares through buybacks. They have reduced from over 188.7 million in 2020 to 182 million today.
Negative hype
Moody's, like other companies with a leading market share, is a highly overvalued company, with a price-to-earnings ratio of 47, higher than the S&P 500 index.
This valuation metric is a sign that its future growth prospects have been priced in by market participants.
The company issued a soft forward guidance when it published its second-quarter financial results.
Analysts expect little upside for Moody’s, with the stock target being $481, up from the current $474.
Summary on Moody’s stock
Moody’s has some of the best metrics in the US. It is an oligopoly in an industry that is highly difficult to penetrate.
Additionally, its business has been growing for many years after its establishment. Analysts believe that its annual revenue will more than double in less than a decade.
Notably, unlike S&P Global that has grown through acquisitions, Moody’s rarely engineers large acquisitions. Instead, the management has focused on buying back its stock, which has boosted its earnings per share over the years.
Moody’s is also a generous payer of dividends. It has a dividend yield of about 0.71% and a payout ratio of 28.75%. A low ratio means that the company has room to grow its dividends over time. Its 10-year dividend growth rate has been 11.78%, higher than the sector median of 7.30%.
The only challenge is that the company is quite expensive since its multiples are much higher than other popular growth-oriented companies.
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