Moody’s Corp. Stock Analysis.

05Jun 2024 by Cattolica Investment Club No Comments

Moody’s Corporation, founded in 1909, has its headquarters in New York City. Moody’s Corporation operates as an integrated risk assessment firm globally, they provide market credit ratings, research, tools, and analysis.

Moody’s Ratings (previously known as Moody’s Investor Service) is the part of the company that deals with credit ratings. Its ratings and research in this field cover debt instruments and securities issued by various entities, including corporations, financial institutions, government, and government-related entities. They measure the credit risk of obligors and issuers. This part of the business generates revenue through various channels:

Rating Fees: Issuers of debt instruments pay fees to Moody’s to rate their debt. The price of these fees depends on the instrument’s complexity.
Annual Fees: Moody’s generally charges companies annually to keep their credit ratings up to date.
Subscription Services: Investors and other agents subscribe to access Moody’s research, ratings data, and their tools.

According to their latest earnings report (1Q 2024) this part of the business made $987 Million in revenues. They have 39% of their revenue as recurring.

Moody’s (previously known as Moody’s Analytics) provides a group of products and services that are used in financial analysis and risk management activities across the globe. This segment benefits from the vast data and expertise of Moody’s Investors Service to serve its clients’ credit analysis, economic research, and financial risk management needs. In 2022, The company started reporting under three segments, which I’ve listed and described below:

Research & Insights: This segment delivers economic research, risk analysis, and customized services to help businesses understand risks, generating revenue primarily through subscription services.
Data & Information: This segment offers data and applications that help enterprises identify, measure, monitor, and manage risks related to primarily fixed income, tax, and transfer pricing, sourcing and supply chain analytics, and corporate and trade credit.
Decision Solutions: The largest revenue generator within Moody’s Analytics, this segment provides financial decision-making services to sectors such as banking, insurance, and KYC (Know Your Customer) data management for suppliers and clients.

According to 1Q 2024 results, this part of the business brought $799 Million in revenues. They have 95% of their revenue recurring.

Industry Outlook

To measure the industry outlook for Moody’s Corporations, I first looked at the credit issuance Market since it accounts for more than half of its revenue under Moody’s Investor Services subsidiary. Despite the higher interest rates, the demand for debt issuance showed resilience in 1Q 2024, which can be observed in Moody’s Investor Services 1Q 2024 results, revenues from its credit rating business are up about 35% compared to the prior-year period. This resilience in credit issuance demand is expected to continue throughout 2024. According to Moody’s Corporation 2024 guidance, they expect Moody’s Investor Service rated issuance to increase in the mid to high single-digit percentage range. Moody’s Corporation makes this guidance based on several assumptions, Real GDP: Global 2.0%-3.0% / Interest rates to remain elevated, with some rate reductions in the second half of 2024. / U.S. high yield spreads to fluctuate around 350 – 450 bps.

Furthermore, for the Moody’s Analytics part of the business, I believe that together with the evolving complexity of financial markets, the needs of its customers for sophisticated analytical tools and data services increases. Furthermore, another factor that positively affects this side of business is the increasing economic uncertainty, which leads companies to prioritize effective risk management. The services Moody’s Analytics serves are well positioned to benefit from these trends. According to the latest earnings report for 1Q 2024, Moody’s Analytics generated $799 million in revenues, with 95% recurring revenue. This high percentage of recurring revenue means the stability of Moody’s Analytics’ business model. Moreover, they have an outstanding 94% retention rate, meaning that almost all of its customers who use its services continue to use Moody’s Analytics services. They are also well-positioned to monetize technological advancements such as AI, since they can offer better solutions to their customers, taking into account the loyalty of their customers, they can easily find demand for their developing products and services. Moody’s expects Moody’s Analytics revenue to increase at a high single-digit percent range in 2024.

Comparative Analysis

In this part of my analysis, I will compare Moody’s Corporation to its top peer, S&P Global.

Price/Earnings Ratio:

Moody’s Corporation: 37

S&P Global: 30

Revenue Growth:

Moody’s Corporation: 15.07%

S&P Global: 7.33%

Gross Profit Margin:

Moody’s Corporation: 72.30%

S&P Global: 67.47%

Since Moody’s Corporation, S&P Global, and Fitch Ratings act as a triopoly in the credit rating business and Fitch is not publicly traded, I compared only with S&P Global.

SWOT ANALYSIS

Strengths:

Brand Reputation: Moody’s is a well-known, reputable corporation. Regarding their credit ratings business, I think it’s pivotal since investors are primarily looking for the most trustworthy and well-known entity to grade debt instruments.

Technological Innovation: Investments in technology and analytics improve Moody’s ability to provide high-quality, data-driven products and services that meet their customers’ evolving needs in the increasing complexity of financial markets.

Market Position: Moody’s Investor Services operates in a market with high entry barriers. The three firms act as a triopoly in the market which leads to impressive market power and pricing advantages that are not easily challenged by potential competitors.

Revenue diversification: During periods of economic uncertainty, companies seek more reliable data before deciding on their investments, boosting demand for Moody’s Analytics services. (By the increased need to measure the risks) On the other hand, stable economic periods typically see a rise in debt issuance, which increases the demand for Moody’s Investor Services. This dual demand dynamic ensures revenue diversification and hedges some risks.

Weaknesses:

Increased Regulations: Moody’s is under more legal and regulatory pressure, especially because of services for pricing financial instruments and credit ratings. The business has a track record of legal problems and regulatory investigations, including the ones from the 2007–2008 financial crisis. These difficulties add to the expenses, distract senior management’s attention, and may result in fines that could impair Moody’s finances.

Exposure to Economic Cycles: As well as economic expansion benefits Moody’s, inversely periods of economic downturns might lead to reduced demand for credit ratings and financial services.

Opportunities:

Global Presence: Since Moody’s Corporation operates in more than 160 countries, it is well positioned to take advantage of economic improvements in emerging markets, since it would lead to an increase in demand for credit ratings and financial analytics.

Mergers And Acquisitions: Strategic Mergers and acquisitions can lead to further growth in their businesses, it can also be observed that they have a good history for those strategic plays that further improve their global reach and improve products and services.

Increasing Complexity in Financial Markets: As discussed above, increasing complexity increases the demand for their tools and risk assessment solutions.

Threats:

Dependence on rates: A possible increase in interest rates may decrease the demand for issuances as the cost of borrowing increases.

Why did we buy MCO?

To conclude, I want to highlight why I think Moody’s Corporation is a good investment opportunity. Primarily, as explained above, the credit-rating business is at the hands of three big rating agencies and it has high barriers to entry, I believe acting as a triopoly in an expected growing industry and having such pricing power is an advantage, it can also be observed that both S&P Global and Moody’s Corporation returns historically outperformed the S&P 500 returns. Moreover, the high growth rate of the Moody’s Analytics subsidiary can be observed (Above 10% revenue growth on average) and is probably going to drive Moody’s financial performance higher in the future with the evolving technology that helps them to provide their loyal customer base with more sophisticated tools. I believe that it is a good way to gain exposure to a rate-cut scenario, given decreasing interest rates tend to increase the demand for issuance from the entities to lower their capital cost. Even though the rate cuts don’t come as soon as expected, I believe in the medium-long-term fundamentals of the company’s business models, especially its sustainability and profitability.

THIS IS NOT FINANCIAL ADVICE

Author: Kaan Pinar

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