That kind of earnings growth undoubtedly makes Warren Buffett a happy investor -- his Berkshire Hathaway
Far from a potential hazard, Moody's business model is actually a low-risk enterprise. The company makes money primarily by providing ratings for issuers of publicly and privately traded securities, a market it dominates with industry leader Standard & Poor's, a unit of McGraw-Hill
The dynamics of the securities markets encourage issuers to keep coming to Moody's for ratings. Nearly all investors in fixed-income securities and derivative instruments require a rating from at least one nationally recognized statistical rating organization, such as S&P or Moody's. Investor confidence in the expertise and reputation of the existing rating agencies makes it unlikely that new competitors could challenge the dominant position of today's industry leaders. (S&P has approximately 40% of the ratings business, and Moody's holds 39%.) In other words, this is a market with steady demand, and dynamics that reinforce Moody's current leading position.
And what a business to dominate! Moody's has achieved net margins of nearly 30% over the past several years. Return on equity has exceeded 100% over the past few years; the company has low capital expenditure requirements and has been able to return much of its income to investors through stock buybacks. With its wide moat and high returns on capital, Moody's is actually a consistent fit with Warren Buffett's investment criteria.
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Fool contributor Michael Leibert welcomes your feedback. He does not own shares in any of the companies mentioned in this article.