Moody's (MCO): Zacks Rank Buy

Zacks

Moody's Corp. (MCO) delivered solid third quarter results last week and provided an upbeat guidance, which has boosted earnings momentum in the past 7 days. Shares of this Zacks #1 Rank (Strong Buy), credit rating agency are near its 52-week high and have appreciated 36.2% year-to-date.

Strong Q3

On October 26, Moody's reported third quarter earnings per share of 75 cents, crushing the Zacks Consensus Estimate by 17.2%. Net sales increased 29.6% year over year to $688.5 million. Revenue growth was driven by strong performances from both the Moody's Investors Service and Moody's Analytics divisions.

Despite a year-over-year hike of 25.0% in operating expenses, the operating margin expanded 230 basis points to 39.2%, primarily due to a higher revenue base.

Upbeat Fiscal 2012 Guidance

Based on strong segment performances, Moody's expects revenues to increase in the mid-teens for 2012. It also raised its earnings outlook to between $2.89 and $2.99 per share from the prior expectation of $2.70 to $2.80.

Earnings Estimate Revisions

In the past 7 days, the Zacks Consensus Estimate for fiscal 2012 increased 6.5% to $2.94 per share as all 5 estimates were revised upward. Meanwhile, the Zacks Consensus Estimate for fiscal 2013 advanced 3.3% to $3.14 on 4 upward revisions out of 6 total estimates.

Valuation is Attractive

Currently, Moody's is trading at a premium to most of its peers based on its P/E, P/S and P/B. Since its expected 5-year earnings growth of 13.9% is higher than the 12.0% average for its peers, the premium is justified. Additionally, the stock is trading at a PEG ratio of 1.2, which is below the peer group average of 2.3, indicating that the momentum should continue.

Chart

Moody's shares have appreciated 18.0% in the past 6 months compared to a mere 0.4% increase for the S&P 500. The significant increase in stock price is on account of its strong growth potential. The stock is currently trading above its 200 day moving average of 75.39. Trading volumes are considerably higher than its peers.

Moody's provides credit ratings, research and analysis covering debt instruments and securities to financial institutions across the world. The company also provides quantitative credit assessment services, credit training services and credit process software to banks and other financial institutions. On January 1, 2008, Moody's reorganized its businesses into two operating divisions - Moody's Investors Service (:MIS), which includes all the rating agency business and Moody's Analytics (MA), which includes other non-rating commercial activities. Moody's competes with Fitch Ratings and Standard & Poor's, Thomson-Reuters, Bloomberg, RiskMetrics, Dun & Bradstreet, Markit Group, CME, Intex and many other smaller providers.


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