Among Warren Buffett's longest-held investments is Moody's, a seasoned data provider that has done a good job of adapting to the modern world
When I was a teenager, I recall looking through old investment books in my father's study. The financial data company Moody's published them in America, and they were the gold standard for reliable financial information and high-quality ratings of publicly traded corporations. Just over 40 years ago, before the internet, this occurred. For the purpose of analysis and decision-making, people and companies paid to have trustworthy data compiled in an easily readable format. Moody's is in charge of this. Finding company data through the mail in book form has long since been replaced by using computers, the internet, and artificial intelligence. Businesses and the securities they issue have experienced rapid expansion. However, Moody's has not only kept up but also provided and analyzed the data that the market requires.
Moody's, which is currently valued at about £83 billion, has given credit ratings to almost £76 trillion in outstanding debt, over 33,300 organizations, and structured finance transactions. Investors depend on these ratings as unbiased evaluations of an issuer's ability to meet its financial obligations. Companies, banks, brokers, asset managers, hedge funds, insurers, and real estate dealers are among its nearly 15,000 clients, and it also offers analytical tools that integrate its data and research for risk assessment and decision-making.
The overall outcome for Moody's investors has been outperformance in the long and medium term stock markets; over the last 20 years, it has outperformed the SandP 500 by more than four times, and over the last five years, it has outperformed by more than 10 percent. The company stated last month during the fourth-quarter results announcement that this year's earnings per share could reach £14.50, which is higher than the projected value of £13 per share. This represents a 16-point-three percent increase over the previous year's results, which were also better than anticipated because the company increased sales in all categories. With increasing cash balances and a solid balance sheet, the company bought back one million of its own shares last year at a price of about £477, which is slightly higher than the current price.
There are several industry drivers that support the optimism. An expected rise in merger and acquisition activity, economic expansion, and lower interest rates may all promote more borrowing. Additionally, startups are assisting businesses in obtaining funds directly from investors, venturing into more conventional bank lending operations. It's critical that these loan issues have credit ratings to provide an unbiased assessment of creditworthiness in order to stimulate investor demand; this is where Moody's comes in. More debt issuance translates into more business.
On the analytics side of the business, Moody's has been investing in AI for more years than the majority of investors have been aware of it. The company is on course to become Wall Street's "go-to" AI source for all information. Unlike most AI output, which doesn't care whether it's correct or not, its building tools allow businesses to analyze data that, crucially, has the authority and accuracy stamp of Moody's. Because financial analysis is thorough and error-free, investors will only look for solid information from reputable sources. Moody's, which has been creating and selling exclusive financial data to Wall Street for over 115 years, is also unmatched by many. AI is probably going to strengthen Moody's market dominance rather than challenge it.
Warren Buffett's investment in Moody's for at least 25 years is not surprising given the company's sound business model and the financial services sector's growth prospects. It meets all of his requirements for a successful long-term investment. Just over 13 percent of Moody's stock, valued at £11 billion, is owned by his holding company, Berkshire Hathaway. Though there is little competition in the specialized financial data industry, firms like Bloomberg and S&P Global are active. Analysts, however, believe that Moody's will continue to grow its sales and profits due to its solid reputation and strong brand. There is a potential 18 percent upside at the consensus price target of £544. Over the next 12 months, there are a number of favorable catalysts that could cause this price target to rise even further.
Why Moody's meets Warren Buffett's needs.
The reason Warren Buffett likes Moody's is that it possesses many of the qualities he believes make for an excellent long-term investment. Its robust "moat" shields it from rivals, to start. It is difficult for new competitors to steal business from it because of its established track record of data harvesting, robust brand, and regulatory positioning. Like Visa and Mastercard, S&P Global is Moody's primary rival and the two companies form a duopoly.
Credit rating is appealing because it should consistently increase, at least in tandem with growing economic activity (businesses must borrow to expand) and the seemingly endless new products and issues from the financial services sector. Because issuers want the Moody's seal of approval to help them sell the bonds, it is compensated for each credit rating it assigns. Moody's has a stable and predictable business model because of the high demand for rated products from only two suppliers and the numerous research services that are paid for through recurring subscriptions. Investors value the stock of these superior companies at premium levels.
Furthermore, you have a lot of control over the prices you can charge when you are one of only two suppliers controlling your market with little chance of competition. Because it allows a business to control and preserve its margins and produce steady profits, pricing power is alluring. In turn, a company's cash generation increases with higher margins and profits, strengthening the balance sheet and increasing the level of protection investors can anticipatea so-called "margin of safety."
Even though Moody's is a growing company, it is also regarded as "defensive," which means it is very immune to changes in the economy. Moody's is still charging because all of the long-term debt that is being issued still needs to have its ratings reviewed and updated in the event that markets decline. The subscription fees should also be stable because, even if organizations reduce expenses, they are less likely to forgo data and research, which could jeopardize their business model as a whole.
Price of Moody's shares in US dollars.
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