In response to my recent discussion of Moody's Corp. (MCO, Financial), reader Kenny asked how it would measure up against the other major ratings company, S&P Global Inc. (SPGI, Financial). He also wondered if S&P Global's moat would be wider than that of Moody's.
Both companies are bond rating agencies, which means they assess corporate and some government bond issuances, helping investors distinguish the levels of quality. That's done with letter grades, not unlike school report cards.
The issuers normally pay an agency to do the rating because rated bonds sell more easily than unrated bonds. Since the agencies essentially hold an oligopoly, issuers pay handsomely to have their products evaluated.
S&P Global is the largest of them, with roughly half of the market, while Moody's is not far behind. The only other major player is Fitch's Ratings Ltd., a subsidiary of the privately held Hearst Corp. The remaining, and small, market share belongs to other companies.
To compare the two big ratings agencies, from an investor's perspective, we will review key fundamental data and guru confidence.
Predictability
Just below the company name on each stock's Summary page at GuruFocus, you can find a predictability score. It ranges from one to five stars; and the higher the score, the better.
The rating is based on the 10-year operating income growth rate, five-year Ebitda growth rate and the one-year operating income growth rate (all three on a per-share basis).
Moody's handily outscores S&P Global on predictability, with the former receiving four stars and the latter getting only one star. GuruFocus reports: "We have found strong correlations between the Predictability of Businesses and the long term return of stocks".
Advantage: Moody's
Financial strength
The companies receive identical ratings from the GuruFocus system for financial strength: 5 out of 10. In the details, though, there are a couple of matters worth noting. First, here is the Moody's table:
And now the S&P Global financial strength table:
Comparing the two, we start with their ability to handle interest expenses from their long-term debt. Both are reasonably comfortable, with interest coverage ratios above 5. S&P Global, though, has nearly double the interest coverage of Moody's.
On the Piotroski F-Score, S&P Global gets a full 9 out of 9, while Moody's is a point back at 8 out of 9. The latter lost that point for what GuruFocus calls, "Change in Gearing or Leverage," meaning "Compare this year's gearing (long-term debt divided by average total assets) to last year's gearing." In other words, Moody's was docked a point for taking on more debt.
One more comparison in this section: Comparing the WACC vs. ROIC ratios. Moody's weighted average cost of capital is 7.3%, while its return on invested capital is 22.5% and the ratio between the two is 3.08%. S&P Global's WACC is 6.3% and its ROIC is 31.02%, for a ratio of 4.92, meaning it is able to get more bang for the buck.
Advantage: S&P Global
Profitability
At first take, Moody's has the edge on profitability with a 10 out of 10 rating, while S&P Global receives an 8 out of 10 rating. Let's examine them more closely, starting with the S&P Global table:
And the Moody's table follows:
After looking at both tables, we see S&P Global has better margins, which is not surprising considering its WACC versus ROIC ratio.
The returns on equity for both are too high to be taken seriously without more research to find out why either numerators or denominators are giving us these astronomical results.
For return on assets, S&P Global is well ahead of Moody's.
But when it comes to the growth metrics at the bottoms of the tables, Moody's has a distinct advantage. Most notably, Moody's has been growing its profitability (Ebitda and earnings per share) faster than its revenue.
Advantage: Moody's
Valuation
Both receive the same overall valuation rating, 1 out of 10, which means both are overvalued.
They have price-earnings ratios that are similar. However, if we consider growth, S&P Global has a distinct advantage. Price-earnings divided by the Ebitda growth rate provides the PEG ratio. The ratios signal that S&P Global is undervalued (0.67) and Moody's is overvalued (2.78); stocks with a ratio of less than 1.00 are considered undervalued, while those above 1.00 are rated as overvalued.
According to the discounted cash flow calculator, Moody's is less overvalued than S&P Global. However, the latter's DCF price is based on a predictability score of only one out of five stars, so it becomes a meaningless comparison.
Before we leave the valuation comparison, let's compare their 10-year price charts, with Moody's in blue and S&P Global in orange;
For most of the past decade, the share prices have been much the same, but coming out of the March crash we see investors have more confidence in S&P Global than in Moody's.
Advantage: S&P Global
Dividends and buybacks
Both companies are focused on growth, rather than producing income for shareholders. First, the Moody's dividend and buyback table:
Next, the S&P Global table:
Both companies have the same dividend payout ratio, 23%, which is relatively low.
The yields are similarly low, which in part will be due to their skyrocketing share prices. Both are growing their dividends at a double-digit pace, but when they're building on a small base, it will take quite some time for their yields-on-cost to be attractive.
S&P Global is devoting more resources to share repurchases than its competitor; in fact, four times as much as Moody's (2.00 versus 0.5).
Advantage: S&P Global
Moats
To compare their moats, we will use the quantitative tools in the Macpherson model. They are a median return on capital and return on tangible equity of at least 15% over the previous 10 years.
First, we can rule out ROTE results for both stocks, since they each have negative scores.
For ROC, both qualify as they have stayed well above 15% over the past decade (with one exception), as shown in this chart:
The chart shows that S&P Global took the ROC lead from Moody's, and at the end of 2019 was up almost 8%.
Advantage: S&P Global
Gurus
Among the investing legends followed by GuruFocus, 20 have positions in S&P Global, while 17 have stakes in Moody's. In the second quarter, 11 of the 20 gurus invested in S&P Global reduced their holdings, while six of 17 in Moody's reduced.
The top three gurus invested in S&P Global are Spiros Segalas (Trades, Portfolio) of the Harbor Capital Appreciation Fund, Pioneer Investments (Trades, Portfolio) and Bill Nygren (Trades, Portfolio)'s Oakmark Fund.
Heading up the holders of Moody's shares are Warren Buffett (Trades, Portfolio) with a massive 24,669,778 shares, which gives him a 13.14% stake in the company and represents 3.35% of Berkshire Hathaway's (BRK.A, Financial)(BRK.B, Financial) assets. Tom Gayner (Trades, Portfolio) of Market Gayner Asset Management had the second-largest position with 211,080 share and third was Steven Cohen (Trades, Portfolio) of Point72 Asset Management with 59,488 shares.
Conclusion
For those keeping score, I have given S&P Global the advantage on four measures, versus only two for Moody's.
That, along with S&P Global's leading market share, suggest that it should be considered the better prospect. However, I'm also influenced by Buffett; if the world's best stock picker makes a huge bet on Moody's, who am I to disagree? These companies are more alike than different, and either one would be a good investment if it was available at a much cheaper price.
Obviously, then, value investors may put these stocks on their watch-and-wait lists, hoping for a sudden disruption that might force the price down to the point where there is a margin of safety. Growth investors might take a shot with either company, but it would be wiser for them to take the plunge when the valuation is more favorable. And income investors can pass them both by, since neither offers much in the way of dividends or buybacks.
Disclosure: I do not own shares in any companies named in this article.
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