Shares of Moody’s (MCO - Free Report) have appreciated 21.6% so far this year against the industry’s fall of 9.8%. The stock has also gained considerably more than the S&P 500 rise of 5.1% in the same frame.
The impressive performance marks a significant rebound from its March lows, when the markets crashed owing the coronavirus-related concerns. Moody’s has regained its lost ground and is now up almost 75% from its 52-week low.
The operating backdrop has somewhat improved as global issuance volumes rise amid strong equity market performance and low interest rates. This, along with Moody’s inorganic growth efforts and cost saving initiative, supported growth. In the first half of 2020, the company’s total revenues grew 16% year over year.
Year-to-Date Price Performance
Further, analysts are bullish on this Zacks Rank #2 (Buy) stock. Over the past 30 days, the Zacks Consensus Estimate for earnings of $9.25 and $9.78 per share has moved marginally upward for both 2020 and 2021, respectively. These indicate growth of 11.6% for 2020 and 5.8% for 2021.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
So, now let’s check out some of the major factors that are likely to provide further impetus to Moody’s stock.
Rising Demand for Credit Ratings & Analytics
Driven by the rise in global IPO activities, increase in equity and debt issuances, and low interest rates, Moody’s is expected to witness steady growth in bond and bank loan issuance revenues as well as higher monitoring revenues related to new ratings. So, corporate finance revenues, the largest revenue contributor at the Moody’s Investors Service division, are likely to continue increasing in the quarters ahead.
Moody’s is currently focused on investing in technology platform and processes to boost operations. Also, the company is undertaking efforts to diversify into the emerging and fast-growing professional services and enterprise risk solutions sectors. Further, rising share of the analytics business, which is not correlated with the volatility of interest rates, has added stability to top-line growth.
The consensus estimate for sales indicates growth of 4.4% and 3.9% for 2020 and 2021, respectively.
Opportunistic Acquisitions Bode Well
Moody’s continues to grow meaningfully through several strategic acquisitions. This has provided it with increased scale and cross-selling opportunities across products and vertical markets. So far this year, the company has acquired Regulatory DataCorp, London-based RBA International and a minority stake in Malaysian Rating Corporation Berhad.
Last year, Moody’s completed two acquisitions – RiskFirst and ABS Suite from Deloitte & Touche LLP. Also, the company had bought stakes in China-based SynTao Green Finance, Four Twenty Seven, Inc. and Vigeo Eiris. At the same time, it divested its Analytics Knowledge Services business. Further, the major acquisitions in 2018 included Amsterdam, Netherlands-based Bureau van Dijk. This deal continues to substantially support Moody’s financials.
All the buyouts are expected to be accretive to the company’s earnings. Moody’s is likely to continue pursuing opportunistic deals, which are strategic fits and also help to diversify its revenue base.
Strong Balance Sheet
Moody’s diversifying efforts are well supported by strong balance sheet position. As of Jun 30, 2020, Moody’s had a total debt worth $6.3 billion, an undrawn revolving credit facility of $1 billion, and cash and cash equivalents of $2.1 billion. These will enable it to continue pursuing growth opportunities.
Additionally, the company has nominal debt maturities through 2021. Also, its times-interest earned — which was 11.7 at second quarter-end — has been improving over the last several quarters. This implies that the company will likely meet near-term debt obligations even if the economic situation worsens.
Additionally, Moody’s has Growth Score of B. Our research shows that stocks with a Growth Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.
2020 Guidance Raised
Following the impressive second-quarter 2020 results, Moody’s raised its full-year earnings and revenue outlook. The company now expects adjusted earnings in the range of $8.80-$9.20 per share (up from the prior expectation of $7.80-$8.40).
Further, Moody’s now projects revenues to increase in the low-single-digit percent range versus the prior guidance of revenue decline in the band of mid-single-digit percent.
Further, the company plans to undertake a restructuring program in second-half 2020 for rationalizing and exiting certain real estate leases. This is expected to result in total pre-tax charges of $25-$35 million and annualized savings of $5-$6 million.
Decent Capital Deployments
In February, Moody’s announced a 12% hike in quarterly dividend. Considering last day’s closing price of $288.68, the company’s dividend yield currently stands at 0.78%.
Further, similar to several other finance sector companies like Morgan Stanley (MS - Free Report) , JPMorgan (JPM - Free Report) and Invesco (IVZ - Free Report) the company has suspended its share repurchase program in response to the coronavirus pandemic. With gradual improvement in operating backdrop, it may resume buybacks soon.
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