Amid increasing borrowing costs, loading up on fundamentally strong and qualitatively superior financial service stocks, Moody’s Corporation (MCO – Get Rating), BB Seguridade Participações S.A. (BBSEY – Get Rating), and Forrester Research Inc. (FORR – Get Rating) could help investors secure superior risk-adjusted returns in a market that is steadily turning the corner.
Yesterday, in line with broad expectations on Wall Street, Federal Reserve Chair Jerome Powell announced the unanimous decision by the FOMC to raise key interest rates by another 25 bps. With this move, the central bank has raised the benchmark borrowing rate to 5.25%-5.50%.
Moreover, unlike in his previous briefings, Chair Powell didn’t commit to another interest rate hike and has instead left the decision open and conditional on the interim economic data before the next FOMC meeting. With the inflation gauge rising by 2.6%, down from a 4.1% rise in Q1 and well below the estimate for a gain of 3.2%, there is increasing belief that the additional interest-rate hike may not materialize.
With an annualized increase of 2.4% in gross domestic product in the second quarter, topping the 2% estimate, Jerome Powell and his team at the Federal Reserve may be on the cusp of achieving the elusive “soft landing.” In his words, “The staff now has a noticeable slowdown in growth starting later this year in the forecast, but given the resilience of the economy recently, they are no longer forecasting a recession.”
However, earlier today ECB raised interest rates by a quarter percentage point, citing persistent inflation. In such a scenario, despite increased optimism, businesses are expected to remain weighed down by high borrowing costs, and economic activity is expected to remain stifled due to relatively scarce credit.
In such a scenario, it would be wise of investors to bank on financial service companies that are well placed to help creditors evaluate and manage their risks and borrowers to avail optimally priced credit.
In the above context, let us look closely at the featured stocks.
Moody’s Corporation (MCO – Get Rating)
As a global integrated risk assessment company, MCO operates through two segments: Moody’s Investors Service (MIS) and Moody’s Analytics (MA). MIS publishes credit ratings and provides assessment services on a range of debt obligations and the entities that issue such obligations in markets globally. Through its offerings, MA supports institutional participants’ risk management activities.
On June 29, 2023, MCO and Microsoft Corporation (MSFT) announced a new strategic partnership to deliver next-generation data, analytics, research, collaboration, and risk solutions built on a combination of Moody’s robust data and analytical capabilities and the power and scale of Microsoft Azure OpenAI Service.
The partnership would seek to create innovative offerings that enhance insights into corporate intelligence and risk assessment for financial services and global knowledge workers.
For the fiscal second quarter that ended June 30, 2023, MCO’s revenue increased by 8.2% year-over-year to $1.49 billion, while its adjusted operating income increased by 5.3% year-over-year to $653 million. Consequently, the company’s adjusted net income increased by 3.2% and 3.6% year-over-year to $423 million, or $2.30 per share, respectively.
MCO’s trailing-12-month gross profit and EBITDA margins of 70.03% and 41.35% exceed the respective industry averages of 58.91% and 20.63%. In addition, its trailing-12-month Return on Common Equity (ROCE), Return on Total Capital (ROTC), and Return on Total Assets (ROTA) of 52.48%, 11.12%, and 9.71% are also significantly higher than the industry averages of 11.19%, 5.25%, and 1.11%, respectively.
In line with the company’s revised guidance, analysts expect MCO’s revenue and EPS for the fiscal year ending December 31, 2021, to increase by 8.7% and 17.2% year-over-year to $5.94 billion and $10.04, respectively. Both metrics are expected to keep growing over the next two fiscals.
