Moody's (MCO) Gains From Strategic Buyouts Despite Cost Woes
Moody's MCO remains well-positioned for growth, driven by its leading position in the credit rating industry, business expansion initiatives and constant focus on diversifying its revenue base. Steadily rising expenses and intense competition across the credit rating industry are key concerns.
Though MCO's revenues declined in 2022 due to lower bond issuances, it still witnessed a compound annual growth rate (CAGR) of 5.3% over the four-year period ended 2022. The momentum continued in the first nine months of 2023. The top line is expected to rise, given the improved mix and lower-risk nature of the company’s product portfolio.
Moody's is focusing beyond its core business of providing credit rating services. The company has increased its exposure to the banking and insurance industries and is diversifying into emerging and fast-growing professional services and ERS businesses. A rising share of the analytics business, which is not correlated with the volatility of interest rates, has added stability to revenue growth.
Moody’s projects 2023 revenues to grow in the high-single-digit percent range.
MCO is exploring opportunities for bolt-on acquisitions that are strategic fits and complement its existing operations. In December 2022, it announced a deal to acquire SCRiesgo, which will bolster its presence in Central America and the Dominican Republic. In March 2022, in a bid to strengthen its Know Your Customer (KYC) capabilities, Moody's purchased 360kompany AG. These, along with several other strategic buyouts over the years, are expected to continue helping MCO diversify revenues and be accretive to earnings.
Analysts seem optimistic regarding MCO's earnings growth prospects. The Zacks Consensus Estimate for the company's 2023 earnings has been revised marginally upward over the past 30 days. It currently carries a Zacks Rank #3 (Hold).
So far this year, shares of MCO have gained 30.6% compared with the industry's rally of 5.9%.
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However, Moody's operating expenses have remained elevated over the past several years, with the metric recording a four-year CAGR of 8.6% (ended 2022). The trend continued in the first nine months of 2023. Overall costs are expected to remain elevated as it continues to invest in franchises and grow inorganically. Management expects 2023 operating expenses to increase in the mid-single-digit percent range.
The company faces competition from Fitch, S&P Ratings Services, Morningstar and many other regional providers. In the analytics segment, it faces competition from Dun & Bradstreet, Bloomberg, IBM, Fiserv and many others. In the risk management software market, MCO competes with large software developers, including SAS, Oracle, IBM and Mysis. The stiff competition will likely continue to put pressure on pricing, which may hurt profitability to some extent.
Finance Stocks Worth a Look
A couple of better-ranked stocks from the finance space are JPMorgan JPM and Interactive Brokers Group, Inc. IBKR.
JPMorgan currently sports a Zacks Rank #1 (Strong Buy). Its earnings estimates for 2023 have been revised 1.6% upward over the past 30 days. In the year-to-date period, JPM’s shares have rallied 14.1%.
The Zacks Consensus Estimate for Interactive Brokers’ current-year earnings has been revised marginally north over the past 30 days. Its shares have gained 10.7% so far this year. Currently, IBKR carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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