Investment overview
My focus has primarily been on the broad energy sector, but there are several interesting themes I have discussed outside the energy sector that have not disappointed. Moody’s Corp. (MCO, Financial) has been on my radar in the past and the stock has moved 52% higher year to date.
With Moody’s announcing third-quarter results that beat estimates, I expect the bullish momentum for the stock to sustain. In addition, several factors support growth for the company over the next couple years.
Moody’s currently offers a healthy dividend payout of $1.52 per share. The company’s dividend is likely to increase on a year-over-year basis in the near future. Over the past five years, the company’s dividend has increased at a compound annual growth rate of 19%. Therefore, I consider Moody’s as a good dividend portfolio pick.
Growth strategy
One of the key factors that makes Moody’s attractive from an investment perspective is the fact the company’s EPS has grown at a robust CAGR of 13% between 2012 and 2016. Revenue during the same period grew at a CAGR of 7% and the company’s operating margin expansion has been healthy.
I believe Moody’s is well positioned to report healthy EPS growth over the next three to five years, which makes the stock worth considering. The following factors are likely to ensure the company’s revenue and EPS growth remains healthy:
For the second quarter, Moody’s reported 58% of revenue was generated in the U.S., 25% from Europe, the Middle East and Africa, 11% from Asia-Pacific and 6% from the Americas. Over the next several years, I expect strong growth from emerging markets as well since Moody’s has pursued analytics-related inorganic growth in these areas.
Moody’s has strong financial flexibility and the company has returned $5.3 billion to shareholders via share repurchases and dividends between 2012 and 2016.
The same financial flexibility gives Moody’s room for inorganic growth. For example, the company acquired Bureau van Dijk, a global provider of business intelligence and company information, in May for $3.27 billion. In 2016, Bureau van Dijk generated $281 million in revenue and $144 million in EBITDA. With a robust EBITDA margin, the acquisition is likely to be accretive to EPS in 2018.
Further, on Oct. 17, Moody’s announced a strategic investment in CompStak, a provider of commercial real estate lease information. These acquisitions will ensure EPS growth sustains for the next several years.Â
While I mentioned emerging markets will be one of the major growth drivers for Moody’s over the next several years, I would also like to mention the company's revenue visibility is healthy from the North America and Europe, the Middle East and Africa segments.
One of the key factors supporting Moody’s revenue growth is the refinancing of non-financial corporate in the next few years. As the charts below show, there will be significant debt maturities arising in the North America and Europe, Middle East and Africa segments over the next several years for the company's rated corporate bonds and loans.
This is likely to translate into healthy revenue from developed markets. Moody’s has done exceedingly well on the margin front. As the operating margin remains robust, EPS will be healthy from developed markets as well.
Conclusion
Moody’s has healthy cash flows, which are likely to sustain in the coming years on the back of recurring revenue as well as bond refinancing transactions.
It is also important to note the company has been a value creator through dividends and share repurchases.
From a valuation perspective, Moody’s is trading at 22 times earnings. I do not see the valuations as expensive considering EPS has been growing at a CAGR of 13% over the past five years.
Overall, Moody’s is appealing at current levels and can be considered with a medium to long-term investment horizon.
Disclosure: No positions in the stock.
