Moody’s Corporation (MCO) is one of the largest credit ratings providers in the world. It came into existence in September of 2000 after the Dun & Bradstreet Corporation (DNB) was separated into two independent, publicly traded entities. When the agreement took place, Dun & Bradstreet changed its name to Moody’s Corp. and spun off the D&B operating segment in conjunction with a tax-free dividend of $4.47 a share.
Since its inception, Moody’s Corp. has been trading on the New York Stock Exchange under the ticker symbol MCO. The company offers a variety of investor services and analytic research. Such products include debt and security analysis, credit training services, quantitative financial research, and credit rating supply. Moody’s employs nearly 7,000 people around the globe and maintains a presence in 28 countries. This strong base of operations has allowed MCO to overcome adversity in the past, while its globally renowned ratings services have kept competitors at bay.
Something else that has aided in its expansion is a focus on the development of partnerships and alliances. The company consistently sought out new markets to enter through agreements with a number of local ratings agencies. Moody’s constituents abroad include CCXI, which operates out of Beijing; Equilibrium, a credit rating and research service with targets in Peru, El Salvador, and Panama; ICRA, a credit ratings enterprise in New Delhi; and MERIS, which handles similar services to the aforementioned firms in the Middle East.
That is not to say these services are provided solely by Moody’s Corp. and its array of partnerships. In fact, the information services industry has experienced excellent growth as a whole of late. Alliance Data Systems (ADS), an enterprise that offers analytic and strategic consulting, has experienced excellent growth in recent months. Thomson Reuters (TRI.TO), too, has expanded its market share with the financial, legal, and tax accounting services it provides. Other competitors include Verisk Analytics (VRSK), I.H.S. Inc. (IHS), and Equifax, Inc. (EFX).
But Moody’s also has grown mightily with the industry. Its core credit service products expanded nicely during 2012 as a result of market uncertainty. Clientele likely felt that compiling as much information as possible regarding project risk analysis and merger options was more important than cutting costs and preserving margins during the period. Indeed, macroeconomic growth has been so slow, with debt rising, that a competitor lowered the country’s rating from AAA to AA+ in 2011.
That milestone has led to some unwanted ramifications. A statement released by the Department of Justice, for example, cited an ensuing lawsuit against McGraw Hill and Standard & Poor’s over their mortgage bond ratings prior to the financial crisis. This information is particularly unnerving for Moody’s investors, who now face the possibility that a suit against that company could be looming, as well. Until the time that such occurs, however, CEO Raymond McDaniel has refused to comment on the matter.
Instead, management will continue to focus on accelerating growth on the international front. Revenues in geographic regions outside the U.S. expanded 15% last year. And while this figure is strong, when considering that top-line contributions from these regions made up 46% of all operating revenues, we note that economic growth in Europe was poor during this term. If Moody’s can harness momentum from a potential rebound in previously struggling areas, it could be in for a very profitable 2013, and beyond.
Moody’s Corp. should continue to control the lion’s share of the market for the foreseeable future. The company’s reputation and quality services have vaulted it to the top of an industry that features significant entry barriers. Moreover, its recent growth amid an uneven economic climate has provided more evidence of the defensive characteristics the industry possesses. We look for the company to expand its focus further internationally over the next year, while growth on the domestic front should remain solid. The lawsuits that the Department of Justice has filed against McGraw Hill and S&P are worth monitoring, but investors need remember Moody’s good historical record on the legal front.
For a more detailed evaluation of Moody’s business prospects, as well as our take on the investment merits of the stock, subscribers are encouraged to study our full page report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.