The recent series of strong earnings reports may be evidence of a goldilocks economy, but the impressive fourth-quarter results delivered by Moody's (NYSE:MCO) point to the company's unique strengths rather than favorable economic conditions. In fact, Moody's has posted steadily increasing revenues and earnings since its spin-off from parent Dun & Bradstreet (NYSE:DNB) in 2000.
Revenue grew to $590 million in the fourth quarter, from $473.2 million in 2005, a 25% increase (see our Fool by Numbers). Results for the full year were similarly impressive, with the credit rating agency boosting revenue to just over $2 billion, an improvement of 19%. Growth in Moody's bottom line followed the changes in the top line. Fourth quarter net income grew by 86%, which included a one-time gain on the sale of a building. Earnings for the full year increased to $753.9 million, a 34% increase from the $560.8 million that Moody's earned in 2005. Share buybacks during 2006 enhanced earnings growth on a per share basis, with Moody's delivering a 40% improvement in EPS.
The ongoing globalization of capital markets and the increasing use of complex structured finance products continued to drive revenue and earnings growth at Moody's Investors Services, the company's most important business unit and the source of more than 80% of total revenues. Nearly all debt issues must obtain a credit rating from at least one independent organization such as Moody's, and the company's 39% share of this business falls just behind the 40% share controlled by the Standard & Poor's unit of McGraw-Hill (NYSE:MHP). While potential competitors would undoubtedly like to grab a piece of this growing market, government regulations and the reputations accumulated by the already dominant players help entrench the existing order and support pricing levels.
At a recent share price of $74, Moody's trades around 28 times earnings. The relatively high multiple reflects the low level of risk in Moody's earnings and the consistently stellar returns the company generates on invested capital. Accordingly, long-term shareholders would likely find an investment in Moody's to be very rewarding.
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Moody's is a Motley Fool Stock Advisor recommendation. You can find out why with a 30-day free trial to the Gardner brothers' market-beating service.
Fool contributor Michael Leibert welcomes your feedback. He does not have a position in the shares of any of the companies mentioned above.
