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Moody's (MCO) Aided by Strategic Buyouts Amid Rising Costs

Moody's Corporation MCO remains well-poised for growth on the back of its dominant position in the credit rating industry, synergies from business expansion moves and constant efforts to diversify revenues. However, mounting expenses and stiff competition across the credit rating industry are headwinds.

Looking at the financials, MCO's revenues witnessed a five-year (2018-2022) compound annual growth rate (CAGR) of 5.3%. Though the metric declined in 2022 and the first quarter of 2023 because of weakness in bond issuance volumes, the top line is expected to rise given the improved mix and lower-risk nature of the company’s product portfolio.

Moody's continues to pursue growth in areas outside the core credit ratings service. The company has increased its exposure to the banking and insurance industries and is diversifying into professional services and ERS businesses. These constant efforts have added stability to its top-line growth.

Moreover, Moody's has grown inorganically and restructured its business from time to time to remain profitable by cross-selling opportunities across products and vertical markets. Last year, it announced a deal to acquire SCRiesgo and acquired 360kompany AG. These, along with other strategic buyouts over the years, are expected to continue helping the company diversify revenues and be accretive to earnings.

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Further, analysts are bullish about the stock’s earnings prospects. The Zacks Consensus Estimate for MCO's current-year earnings has been revised 4.1% upward over the last 60 days. The company currently carries a Zacks Rank #3 (Hold).

In the past three months, shares of MCO have gained 11% against the industry's 1.3% decline.

 

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Zacks Investment Research


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However, Moody's operating expenses have remained elevated over the past several years, with the metric recording a CAGR of 8.6% for the five-year period ended 2022, mainly due to a rise in selling, general and administrative costs. The uptrend in expenses continued in the first quarter of 2023. Overall costs are expected to remain elevated because of inflation and as the company continues to invest in franchises and grow inorganically. It 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.

Finance Stocks Worth a Look

A couple of better-ranked stocks from the finance space are Pathward Financial, Inc. CASH and JPMorgan Chase & Co. JPM.

The Zacks Consensus Estimate for Pathward Financial’s current-year earnings has been revised 1.8% upward over the past 60 days. Its shares have gained 20.6% in the past six months. Currently, CASH carries a Zacks Rank #2 (Buy).

JPMorgan currently sports a Zacks Rank #1 (Strong Buy). Its earnings estimates for 2023 have been revised marginally downward over the past 30 days. In the past six months, JPM shares have rallied 6.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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JPMorgan Chase & Co. (JPM) : Free Stock Analysis Report

Moody's Corporation (MCO) : Free Stock Analysis Report

Pathward Financial, Inc. (CASH) : Free Stock Analysis Report

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