Moody's Corporation (NYSE:MCO), which primarily provides credit ratings; and credit, capital markets, and economic related research, data, and analytical tools worldwide, has witnessed an EPS growth at a CAGR of 21% in the last five years. This article discusses the reasons for believing that the strong growth will continue for Moody’s Corporation.
Strong Recurring Revenues
In the last year, Moody’s has reported revenue of $3 billion with 69% of the revenue coming from Moody’s Investor Service and 31% of the revenue coming from Moody’s Analytics. While the recurring revenue from the Investors Services is marginally lower at 37%, the recurring revenue from Moody’s Analytics is significantly higher at 77%. A strong recurring revenue stream ensures that the company has a firm revenue pipeline, besides the additional transaction revenue it generates.
Diversified Revenue Profile
Moody’s has a diversified revenue profile in terms of regional revenue and the global diversification spreads the risk. For Moody’s Investors Services, 41% of the revenue comes from outside the United States and for Moody’s Analytics, 55% of the revenue comes from outside the United States.
Moody’s has an increasing presence in the emerging markets and this should help the company sustain its long-term growth. Moody’s acquisition of Copal Partners in 2011 and the acquisition of Amba Investment Services in 2013 (both India) has created a regional market leader in analytics and research support services.
Therefore, the organic and inorganic diversification strategy ensures that Moody’s continues to grow at a strong pace.
Strong Outlook For FY2014
Moody’s Corporation has guided for an EPS of $3.9-$4.0 for FY14. The higher end of the guidance implies an 11% EPS growth as compared to FY13.
The outlook is also positive on the margin front with Moody’s guiding on an adjusted operation margin of 45%-46% for FY14 as compared to 44.7% for FY13. Even if the margin expansion is 30 basis points, the positive margin expansion trend will continue.
In terms of dividend growth, the 1Q14 dividend translates into an annualized dividend of $1.12 per share and this implies a dividend growth of 24% as compared to FY13 dividend of $0.9 per share.
Besides the dividend, Moody’s Corporation is also creating shareholder value through share repurchase. In FY13, the company repurchased shares worth $893 million and the company intends to repurchase shares in the range of $400-$750 million in FY14.
This will additionally boost the EPS. Further, Moody’s Corporation expects free cash flow for the year to be $900 million and therefore the share repurchase should not be an issue in terms of pressurizing the financial flexibility.
Strong Industry Outlook
Moody’s Corporation is likely to exhibit strong growth on robust industry fundamentals. The transaction revenue will continue to grow with investment-grade U.S. non-financial companies having $793 billion in bond maturity in 2014-18.
Further, Speculative-grade U.S. non-financial companies have $283 billion of high-yield bonds and $454 billion of bank loan facilities maturing through 2018. A strong maturity pipeline ensures that transaction revenue for Moody’s Investor Services will remain robust.
Even in the Asia Pacific region, there is a strong maturity pipeline for Moody’s rated corporate bonds and loans. Over the next four years, $363 billion of investment and speculative grade bonds (Moody’s rated) are maturing.
Another positive factor for Moody’s is that growth has bottomed out in all likelihood in emerging markets. As global growth trends higher, new bond issuances will also pick up speed.
Even in times of relatively flat bond issuances (y-o-y), Moody’s revenue has grown. The growth is likely to be robust when issuances pick up with economic recovery.
Growing regulatory requirements for financial institutional globally is another long-term revenue driver for Moody’s. The markets will remain very active over the next 3-4 years with the implementation of substantial liquidity and leverage norms, among others, globally.
Moody’s Corporation has grown at a robust pace after the financial crisis and the growth momentum is likely to sustain with the company also looking for inorganic growth.
On a PEG basis, Moody’s looks relatively attractive at a PEG (5-yr expected) of 1.6 as compared to a PEG (5-yr expected) of 1.8 for Dun & Bradstreet (NYSE:DNB).
Moody’s is also attractive from a growing dividend perspective along with shareholder value creation through share repurchase. Investors can consider this rating agency with a long-term investment horizon.