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Is Moody’s Stock a Buy?

By Dave Kovaleski – Updated Apr 15, 2020 at 11:18AM

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The credit rating agency remains a solid investment.

There are a lot of great long-term stocks available to investors, but few of them have been able to avoid losing value during this historic stock market correction. However, Moody's (MCO 0.90%) has been able to navigate the choppy waters of the last few months, down about 3% year to date. In 2019, the stock was up 69.5%, and over the last 12 months, it is up about 22%. Here are three reasons why Moody's remains a good buy.

It has a wide moat

When Warren Buffett was asked years ago what he looks for in the companies he invests in, he started with the same idea I'm starting with today: "What we're trying to do is we're trying to find a business with a wide and long-lasting moat around it ... protecting a terrific economic castle with an honest lord in charge of the castle." It all starts with the moat: a distinct competitive advantage that enables a business to maintain pricing power and generate consistent profit margins.

As a leading provider of credit ratings, research, and risk analysis, Moody's has that moat. Moody's is one of just three major credit rating agencies, along with S&P Global and Fitch. These three companies control about 95% of the global market share -- and Moody's is one of the two largest, splitting about 80% of the market with S&P.

That moat is well protected by the simple fact that it really isn't a space that needs more than a few different rating agencies; more players would dilute the standard. Rating agencies are also heavily regulated, creating another barrier to entry.

The words credit rating spelled out in Scrabble wooden letters

Image source: Getty Images.

It has been a stellar performer

Over the last 10 years, Moody's stock has beaten the S&P 500 every year except two. Over that time frame, the S&P 500 has delivered an annualized return of 13.5%. Through Dec. 31, 2019, Moody's had a 10-year average annual return of 24.4%.

Its earnings potential remains strong

Moody's topped off a great 2019 by beating earnings estimates in the fourth quarter, as adjusted net income rose 20% compared to the same period the previous year. Revenue rose 16% in the quarter, led by Moody's Investors Service -- the credit rating arm -- which saw revenue jump 21%. Revenue improved 10% for the quarter at Moody's Analytics. Debt issuance was up 18% in the quarter, which is a good sign for Moody's, as it makes most of its revenue by rating debt issuance.

In its Feb. 12 earnings release, the company issued a 2020 outlook that called for diluted earnings per share in the $8.60 to $8.80 range and adjusted diluted EPS to be $9.10 to $9.30. That would be up from a diluted EPS of $7.42 and adjusted diluted EPS of $8.29 for 2019. Then the novel coronavirus pandemic hit the U.S., and on March 11, the company revised its guidance down to the lower end of those ranges. "We are revising Moody's Investors Service's full year 2020 revenue guidance from mid-single-digit to low-single-digit percent growth reflecting ongoing uncertainty related to the coronavirus," CEO Raymond McDaniel said. "We will continue to monitor and proactively manage our response to the situation as we work to meet stakeholder expectations."

Debt issuance will definitely be affected by the coronavirus crisis, as Moody's downgraded the outlook for corporate debt from stable to negative on March 30.

At the same time, the company has made moves to bolster its analytics business and diversify its revenue through acquisitions. In February, it acquired Regulatory DataCorp, a company that provides data to help companies stay in compliance with anti-money laundering and know-your-customer regulations. Last year, Moody's acquired RiskFirst, a firm that provides risk analytics to asset managers and pension funds, expanding Moody's analytics offerings to the institutional buy-side.

Moody's should continue to outperform the market through this downturn and deliver solid long-term earnings and returns. It's still a good buy and would make a great addition to a portfolio.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Moody's and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short June 2020 $205 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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Stocks Mentioned

Moody's Corporation Stock Quote
Moody's Corporation
MCO
$251.98 (0.90%) $2.24
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$410,704.98 (2.29%) $9,214.98
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$271.78 (2.38%) $6.31
S&P Global Inc. Stock Quote
S&P Global Inc.
SPGI
$314.77 (0.48%) $1.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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