Moody’s (MCO) stock price has done well over the years, helped by its organic growth and its role in the financial services industry. It has jumped from below $10 in 1998 to almost $500 today, meaning that a $100 investment at the time would now be worth over $7,300.
A leading oligopoly
Moody’s is an oligopoly that competes with two other companies: Fitch and S&P Global.
It is a well-known brand that is used by most governments and corporations who are raising capital.
Its services are used by hedge funds, institutional investors, companies, and other organisations
Moody’s is relatively different from S&P Global, which has combined organic growth with acquisitions. For example, it spent $44 billion to acquire IHS Markit. It also acquired companies like FiscalNote, RateWatch, and Kensho Technologies.
While Moody’s is known for its ratings, the company does other things, including research and insights and data & information. Its research and insights mostly focus on fixed income.
Moody’s business has done well in the past few decades as capital needs have grown substantially. Its annual revenue has jumped from over $4.8 billion in 2018 to over $5.96 billion in the last financial year.
Interest rates as a catalyst
Moody’s and other rating agencies will likely benefit as interest rates fall. In the US, the Federal Reserve has already slashed rates by 0.50% and hinted that it will continue cutting in its attempts to engineer a soft landing.
The same trend is happening in other countries like South Africa, the European Union, China, and Switzerland.
Low interest rates will likely lead to more borrowing and corporate activity like M&A. Indeed, recent data shows that companies have announced M&A deals worth over $1.5 trillion this year.
Some of the most notable deals this year are Diamondback Energy’s buyout of Endeavor Energy Partners, Home Depot’s acquisition of SRS Distribution, and Synopsys’s buyout of ANSYS.
Low rates will also trigger more Initial Public Offerings, especially among companies owned by private equity companies. Most leading PE firms hold hundreds that should now be either taken public or merged.
Therefore, analysts expect that its revenue will be $1.61 billion in the third quarter while its annual figure will be $14.2 billion.
The most recent results showed that its business was growing, helped by the rising hopes of interest rate cuts. Its quarterly revenue rose to over $1.8 billion, up from $1.49 billion in the same quarter in 2023. Its half-year revenue was $3.63 billion, an increase from $3.4 billion last year.
Good rewarder of shareholders
Moody’s has also been a good rewarder of its shareholders. It has a small dividend yield of 0.72% because of its strong stock performance. Its five-year dividend growth rate has been 11.3%, while its CAGR 10-year growth rate is 11.78%, higher than the sector median of 7.3%.
Moody’s has a tiny dividend payout ratio of 28%, meaning that it has room to continue growing its payouts to investors. It has also raised its payouts for 14 years, meaning that it is a potential future dividend aristocrat.
At the same time, the company has been reducing the number of its outstanding shares, which has boosted its earnings per share. Its forward EPS growth is 14.35%, higher than the industry median of 3.7%.
Valuation concern remains
Therefore, with Moody’s, we have a company that is still growing and one that has a long record of rewarding its shareholders.
The main concern is that it is highly overvalued. Data by SeekingAlpha shows that it has a forward PE ratio of 42, higher than the sector median of 11.9. Its EV-to-Sales ratio is 13.5, higher than the sector median of 3.12.
Other metrics show that Moody’s business is expensive. For example, it trades at a price-to-book ratio of 22.85, higher than the sector median of 1.2.
These numbers explains why analysts have a neutral view about its stock. The average estimate for the stock is $481, slightly higher than the current $474.
Moody’s stock analysis
On the monthly chart, we see that the MCO stock rose for four consecutive months before pulling back this month. It has remained above the key resistance point at $397, its highest point in November 2021, and its previous all-time high.
The Relative Strength Index (RSI) and the Stochastic Oscillator have all moved to the overbought level.
Therefore, in the long term, there is a chance that the stock will continue to do well. However, in the near term, a retest of the support $397 cannot be ruled out.
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