Credit Scores Rule the World, and These 3 Companies Control Them All (Are You Invested?)

Did you know that a single credit rating downgrade can cost a company billions of dollars? Credit rating agencies play a critical role in shaping global financial markets by assessing the creditworthiness of entities and financial instruments. For investors seeking stability and consistent returns, these companies can offer compelling opportunities. This blog post explores three top credit rating stocks – Moody's, S&P Global, and Fair Isaac Corporation – delving into their business models, the reasons to invest in them, and their impressive financial metrics.

In partnership with

#1. Moody's Corporation (NYSE: MCO)

What They Do

Moody's Corporation is a cornerstone of the financial world, providing indispensable credit ratings, research, tools, and analysis that contribute to transparent and integrated financial markets. Through its two main segments—Moody's Investors Service and Moody's Analytics—the company offers comprehensive credit ratings and innovative software solutions for risk analysis. Founded in 1909, Moody's has cemented its reputation as a globally recognized and trusted brand, serving a diverse clientele that includes financial institutions, governments, corporations, and investors worldwide.

Why Invest?

Wide Moat Analysis [Overall Moat Score: 8.2]

• Brand Monopoly: Moody's brand is synonymous with reliability and accuracy in credit ratings, ensuring a continuous demand for its services across global markets.

• High Barriers to Entry: The credit rating industry is characterized by significant barriers to entry, including stringent regulatory requirements, the necessity for vast datasets, and the high cost of establishing credibility.

• High Switching Costs: Financial institutions integrate Moody's ratings deeply into their risk management frameworks, resulting in high switching costs.

• Network Effect: The extensive use of Moody's ratings by numerous entities enhances their value and reinforces the company's market position.

• Huge Economies of Scale: Moody's leverages significant economies of scale, spreading fixed costs over a broad revenue base to enhance profitability.

Financial Performance:

• Revenue Growth: Moody's has demonstrated consistent revenue growth with a 5-year CAGR of around 10%. For 2023, the company reported revenues of $6.7 billion, up from $6.2 billion in 2022.

• EPS Growth (Earnings per Share): EPS is a measure of a company's profit per share of outstanding stock. Moody's EPS has grown significantly, with a 5-year CAGR of approximately 12%. In 2023, Moody's reported an EPS of $11.77, compared to $10.25 in 2022.

• Free Cash Flow Per Share Growth: Free cash flow refers to the cash a company generates after accounting for cash outflows used in its business operations. Moody's free cash flow per share has grown at a 5-year CAGR of 13%. In 2023, free cash flow per share was $12.45, an increase from $11.10 in 2022.

• Stock Performance vs. SPY: Over the past 5 years, Moody's stock has significantly outperformed the S&P 500 (SPY), delivering a return of approximately 125%, compared to the SPY's return of about 75%.

Investment Rationale

Moody's stands out as a beacon of financial strength and reliability. Its impressive financial performance, critical market position, and the ever-growing demand for credit ratings and analytics make it a compelling investment. The company's robust free cash flow generation underpins its growth and shareholder returns. Furthermore, Moody's strategic acquisitions and technological investments continue to bolster its competitive edge and market reach.

#2. S&P Global Inc. (NYSE: SPGI)

What They Do

S&P Global Inc. is an essential player in the financial markets, providing credit ratings, benchmarks, analytics, and data to capital and commodity markets worldwide. Its diverse divisions include S&P Global Ratings, S&P Global Market Intelligence, S&P Dow Jones Indices, and S&P Global Platts. Established in 1860, S&P Global has evolved into a leading provider of financial information and analytics, offering indispensable insights and data to its global clientele.

Why Invest?

Wide Moat Analysis [Overall Moat Score: 8.6]

• Brand Monopoly: S&P Global's brand is synonymous with financial benchmarks and credit ratings, earning high trust and recognition in the industry.

• High Barriers to Entry: The industry poses significant barriers to entry, including regulatory hurdles, extensive data requirements, and high costs to establish a reputable brand.

• High Switching Costs: S&P ratings are deeply embedded in financial contracts and investment decisions, resulting in high switching costs for clients.

• Network Effect: The widespread use of S&P indices and ratings by financial institutions and markets enhances their value and influence.

• Huge Economies of Scale: S&P Global benefits from vast economies of scale, allowing it to cover a wide array of financial markets and products efficiently.

Financial Performance:

• Revenue Growth: S&P Global has shown a robust revenue growth rate with a 5-year CAGR of 9%. In 2023, the company reported revenues of $8.6 billion, up from $7.9 billion in 2022.

• EPS Growth: The company’s EPS has grown at a 5-year CAGR of 11%, driven by efficient operations and scale. The 2023 EPS was $14.12, up from $12.85 in 2022.

• Free Cash Flow Per Share Growth: Free cash flow per share has increased at a 5-year CAGR of 12%, reflecting strong operational efficiency. In 2023, free cash flow per share was $14.75, up from $13.10 in 2022.

• Stock Performance vs. SPY: Over the past 5 years, S&P Global's stock has outperformed the S&P 500 (SPY), delivering a return of approximately 135% compared to SPY's return of about 75%.

Investment Rationale

Investors should consider S&P Global for its dominant market position, diverse revenue streams, and strong financial health. The company's relentless pursuit of innovation and expansion into new markets solidifies its growth prospects. S&P Global's strategic acquisitions, such as the purchase of IHS Markit, further enhance its market leadership and data analytics capabilities, ensuring it remains a formidable force in the financial services sector.

#3. Fair Isaac Corporation (NYSE: FICO)

What They Do

Fair Isaac Corporation, known widely as FICO, is a trailblazer in analytics software, specializing in credit scoring services. Since its founding in 1956, FICO's credit scores have become a staple in assessing the credit risk of individuals and businesses. The company also offers a range of software solutions for decision management and predictive analytics, serving as an essential tool for lenders and financial institutions.

Why Invest?

Wide Moat Analysis [Overall Moat Score: 7.8]

• Brand Monopoly: FICO's brand is synonymous with credit scoring, with its scores being the most widely recognized and utilized in the United States.

• High Barriers to Entry: The credit scoring industry has high barriers to entry, including the need for extensive data, proprietary algorithms, and established relationships with financial institutions.

• High Switching Costs: Financial institutions face high switching costs because FICO scores are integral to their credit decision processes and risk management systems.

• Network Effect: The widespread use of FICO scores by lenders and consumers reinforces their importance and reliability, creating a network effect.

• Huge Economies of Scale: FICO benefits from significant economies of scale, particularly in its software and analytics divisions, allowing for efficient service delivery and cost management.

Financial Performance:

• Revenue Growth: FICO has demonstrated steady revenue growth with a 5-year CAGR of 8%. In 2023, the company reported revenues of $1.5 billion, up from $1.4 billion in 2022.

• EPS Growth: The company’s EPS has grown impressively, with a 5-year CAGR of 15%, driven by both revenue growth and operational efficiencies. The 2023 EPS was $15.29, compared to $13.45 in 2022.

• Free Cash Flow Per Share Growth: FICO's free cash flow per share has grown at a 5-year CAGR of 13%, indicating strong cash generation. In 2023, free cash flow per share was $16.10, an increase from $14.20 in 2022.

• Stock Performance vs. SPY: Over the past 5 years, FICO's stock has significantly outperformed the S&P 500 (SPY), delivering a return of approximately 200% compared to SPY's return of about 75%.

Investment Rationale

FICO's essential role in the credit industry, strong financial performance, and innovative approach to analytics make it a compelling investment. Its consistent growth in revenue, EPS, and free cash flow underscores its potential for long-term value creation. FICO's focus on expanding its software and analytics capabilities positions it well for continued success in a data-driven economy. The company's investments in artificial intelligence and machine learning can further enhance the accuracy and efficiency of its credit scoring models, solidifying its position as a leader in the credit risk assessment landscape.

Risks to Consider

While credit rating agencies offer attractive investment opportunities, it's crucial to acknowledge some potential risks:

• Regulatory Scrutiny: Credit rating agencies faced criticism for their role in the 2008 financial crisis. Regulatory changes could impact their operations or profitability.

• Economic Downturns: During economic downturns, defaults on loans and other financial instruments could negatively affect the demand for credit ratings.

• Competition: New players or alternative credit rating methodologies could emerge, challenging the dominance of established agencies.

Conclusion

Investing in credit rating stocks like Moody's, S&P Global, and Fair Isaac Corporation can offer investors stability and consistent returns. These companies boast wide economic moats, impressive financial performance, and play critical roles in the financial ecosystem. Their consistent growth and strong market positions make them attractive additions to a diversified investment portfolio.

Remember, conducting thorough due diligence and meticulously assessing the valuation of these stocks is vital before making any investment decisions. The market may have already priced in much of these companies' future growth potential. By thoroughly researching their financial health, future prospects, and current market conditions, investors can make informed choices that align with their individual risk tolerance and long-term investment goals.

Building a well-diversified portfolio remains essential. Consider including asset classes beyond credit rating stocks, such as real estate, bonds, or commodities, to mitigate risks and achieve a well-rounded investment strategy.