Moody’s Corporation (MCO), the credit rating organization, operates in an oligopoly with strong pricing power and a benign economic outlook that has enabled it to report annual revenue growth of 7% and annual EPS growth of 13% over the past five years. It is a highly profitable business with strong margins and, importantly, no additional capital required for growth which is fortunate given the company’s appetite for share buy backs.
There are other rating agencies but the top 3 (Moody’s, Standard and Poors and Fitch) still control 95% of the market (with Moodys and S&P each controlling about 40%) and there is no sign that things are going to change. Banks, funds and regulators are conservative and if debt issuers want their bonds to be well received then a rating from one or more of the main agencies is often a requirement.
Looking forward the outlook is for more of the same. Bond markets issuance has been buoyant recently but the impact of a slow down would be limited. We will always require credit rating and analytic services and international opportunities are growing as demonstrated by Moodys recent acquisitions of SCDM in Europe and last years move to take full ownership of Korea Investor Services.
Priced on a PE of 24.4 with a dividend yield of 1.32% Moody’s is not cheap, but given strong pricing power and growth prospects it looks worth it.
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Disclosure: The author holds no positions in any of the stocks mentioned nor has any intentions to initiate any in the next 72 hours.