One of Warren Buffett’s favorite stocks had a huge Q3, so why was the stock down 4% post earnings? Is this a buying opportunity?
Credit rating agency Moody’s (NYSE:MCO) scored record revenue and had blowout earnings in the third quarter but the stock price was down 4% on Tuesday and was flat on Wednesday.
It is a bit of a head scratcher as to why the stock price is dropping, considering the quarter Moody’s just turned in. Revenue jumped 23% to $1.8 billion, a record for the third quarter and the fourth best quarter ever.
Net income rose 37% year-over-year to $534 million, or $2.94 per share. Adjusted earnings were $3.21 per share, which easily beat estimates.
“Moody’s record-breaking revenue performance in the third quarter is a testament to our unwavering status as the agency of choice for our customers and our actions to prime the business for durable future growth,” Rob Fauber, Moody’s president and CEO, said.
Yet the stock price was falling. Is this a buying opportunity?
A Buffett favorite
Those not familiar with Moody’s should get to know this great company. It is one of Warren Buffett’s longest held stocks, and for good reason, as it has been a stellar long-term performer.
Over the past 10 years Moody’s stock has returned 17.4% annually and over the past five years it has an annualized return of 17.1%, so it has been consistently excellent. Also, it has gained 51% over the past 12 months and 20% this year.
The reason it is such a strong performer is because its main business, credit ratings, is the dominant player among a small pool of competitors. Three major agencies basically make up the entire industry, and Moody’s is the largest along with Standard & Poor’s. Plus, it is a very difficult market to penetrate, with a moat around its business that is hard for new competitors to pierce.
It also has a strong and growing analytics business, that provides market data and intelligence to institutional investors. Moody’s Analytics is a nice complement to the credit rating arm, as it tends to perform well in down markets.
But this is certainly not a down market for Moody’s, as the resurgence of the bond market led to a 51% increase in bond issuance, which pushed revenue higher.
Within Moody’s Investor Services, the credit rating business, revenue rose 41.1% in Q3, year over year, to $983 million. Moody’s Analytics saw revenue rise 7% to $831 million. Both businesses are roughly equal in terms of revenue generation, depending on the market, and one usually zigs when the other zags, so it’s typically a nice balance that allows Moody’s to perform in most any market environment.
So why was Moody’s stock down?
The other outstanding aspect of the Q3 earnings report was the outlook, in which Moody’s raised its targets for fiscal 2024. It raised its revenue guidance for fiscal 2024 to high-teens growth, from low-teens growth, and boosted the EPS target to $10.85 to $11.05 per share, up from $9.95 to $10.35 per share.
Also, operating margin, operating cash flow, and free cash flow guidance were all raised as well.
Wall Street analysts were bullish on the results, as several raised their price targets, including Baird, which boosted it from $490 to $512. That would be a 9% increase over the current price of $469 per share. The median price target among the analysts that cover Moody’s is $498, which would be a 6% increase.
I think the main issue for Moody’s stock is the valuation, which is high at 48, but not out of the range from where it has been the last year or so. The slight dip this week could be followed by another, but investors may want to jump on it if it drops again.
This is a great stock, with excellent long-term returns and strong prospects for continued growth. If you can get it on the dip, it’s probably worth a look.
