What happened
Shares of Moody's (MCO 1.23%) surged 69.5% in 2019, according to S&P Global Market Intelligence. Moody's has a strong competitive moat, as one of only three major global debt ratings agencies, along with Fitch Ratings and S&P Global (SPGI 1.06%). Collectively, these agencies have a 90% market share of global credit ratings.
At the end of 2018, as the Federal Reserve raised interest rates, debt issuance fell, harming the ratings agencies. However, as the Federal Reserve changed its tune in 2019 and began cutting rates, more companies felt the confidence to issue more debt. That, combined with continued growth in the smaller but significant analytics software segment, helped shares more than double the market's total returns this year.
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So what
In the third quarter of 2019, overall debt issuance grew for the first time in a year, after four straight quarters of declines. That led to 16% growth in Moody's Investors Service -- the segment that gives debt ratings and which makes up roughly 62% of revenue. Meanwhile, the smaller Moody's Analytics Services segment hummed along with 13% growth in the third quarter.
Investors somewhat anticipated the return to growth, as Moody's had already surged 39.5% in the first half of 2019 in anticipation of lower rates and more confidence on the part of CEOs and CFOs.
During the year, Moody's also made a number of bolt-on acquisitions to boost its analytics services, especially in the field of ESG risk assessment, with the acquisitions of Video Eliris, Four Twenty Seven, Inc., and Syntao Green Finance. In addition, Moody's also acquired RiskFirst, a leading risk analytics provider to asset managers and pension funds, along with AB5 Suite, a software platform for asset-backed securities issuers and trustees.
Now what
Moody's has won investors' praise for leveraging its wide-moat, high-margin debt issuance business to buy up software companies, which also have a strong recurring financial profile. Yet aside from product expansion into software, Moody's is also set to expand geographically. Moody's owns a 30% stake in CCXI, China's largest debt rating agency, and in September the company launched Moody's Local, which will begin issuing credit ratings in Latin America.
As long as interest rates don't spike and economic growth keeps humming along domestically and abroad, things should remain favorable for Moody's shares because of its dominant position in credit ratings and its strong analytics portfolio -- though perhaps not quite as good as 2019.
