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Moody's Surges 57.2% YTD: Will the Outperformance Continue?

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Shares of Moody’s (MCO - Free Report) have jumped 57.2% so far this year, significantly outperforming the industry’s rise of 19.7%. The stock also surpassed the S&P 500 rally of 23.3% in the same frame.

The stellar performance marks a significant rebound following a disappointing 2018. The company’s shares lost 5.1% mainly owing to tough operating backdrop in the fourth quarter.

This challenging operating environment persisted in the first few months of 2019 too, as bond issuance volume remained weak. Thereafter, global issuance volume gradually improved. This, along with Moody’s inorganic growth efforts and cost saving initiative, supported the growth. In the first nine months of 2019, total revenues grew 6% 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 has moved 1.5% and 1.4% upward for 2019 and 2020, respectively.

Let’s check out some of the key factors that are likely to provide further impetus to Moody’s stock.

Rising Demand for Credit Ratings & Analytics

Given the rise in global M&A and IPO activities, and low interest rates, Moody’s is expected to witness a steady increase in bond and bank loan issuance revenues as well as higher monitoring revenues related to new ratings. Thus, 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.

Opportunistic Acquisitions Bode Well

Moody’s grew meaningfully over the years through several strategic acquisitions. This has provided it with increased scale and cross-selling opportunities across products and vertical markets.

So far this year, Moody’s has completed two acquisitions – RiskFirst and ABS Suite from Deloitte & Touche LLP. Also, the company has announced stake buying in China-based SynTao Green Finance, Four Twenty Seven, Inc. and Vigeo Eiris. At the same time, it divested its Analytics Knowledge Services business.

Earlier in 2018, the company acquired Omega Performance and Reis Inc., while in 2017, Moody’s acquired the structured finance data and analytics business of Frankfurt-based SCDM and Amsterdam, Netherlands-based Bureau van Dijk.

All the strategic 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 diversify its revenue base.

Upbeat 2019 Guidance

Moody’s raised its 2019 guidance for adjusted earnings in the last two reported quarters. During third-quarter 2019, the company raised its full-year adjusted earnings guidance to the range of $8.05-$8.20 per share from $7.95-$8.15 projected earlier.

Further, the company projects revenues to rise in the high-single-digit percent range (up from the previous outlook of increase in the mid-single-digit percent range).

Strong Balance Sheet

Moody’s diversifying efforts are supported by strong balance sheet position. As of Sep 30, 2019, the company had total cash, cash equivalents and short-term investments of $1.27 billion. This will enable Moody's to pursue growth opportunities.

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 (Strong Buy) or 2, offer the best upside potential.

Other Key Picks

Over the past 30 days, Hilltop Holdings (HTH - Free Report) witnessed an upward earnings estimate revision of 13% for 2019. Its share price has surged 37.9% year to date. The stock sports a Zacks Rank of 1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings estimates of Ares Capital Corporation (ARCC - Free Report) for 2019 have been revised 1.6% upward over the past 30 days. Its shares have rallied 19.7% so far this year. The stock carries a Zacks Rank #2.

Over the past 30 days, Eaton Vance’s (EV - Free Report) fiscal 2019 earnings estimates have remained unchanged. Shares of this Zacks Rank #2 company have rallied 36.7% so far this year.

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