Does Moody’s stock offer a buying opportunity?

Moody’s (NYSE:MCO) shares fell sharply in after-hours trading Tuesday and into Wednesday, as the market reacted to the company’s fourth-quarter results and 2024 outlook falling short of consensus expectations. As a result, the stock fell about 9%, from $402 per share at Tuesday’s close to about $364 per share in Wednesday morning trading.

While the company missed estimates, the question is: was the massive sale justified? And does this present a buying opportunity? Let’s take a closer look.

Buffett’s Favorite Things

Moody’s is a leading U.S. credit rating agency with a handful of competitors, including Standard & Poor’s (NYSE:SPGI). So the first thing to understand about this company is that it’s a big fish in a small pond. It also has a protective moat as a market leader in an industry that is very difficult to enter.

Besides that middle and high school grades That status is only secondary because Moody’s Analytics actually provides much more revenue than its credit rating business, which is called Moody’s Investors Service. And the analytics business, which provides market information and data to institutional investors, tends to balance the balance at Moody’s Investors Service and typically performs well when markets are down and credit issuance is low.

Moody’s has been in the Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) portfolio since 2000 and is one of Warren Buffett’s largest holdings, making it a clear favorite business of Warren Buffett.

So, as Buffett can attest, this is a stock built for the long term, with four quarterly earnings forecasts in sight.

Yes, revenues were below expectations, as were revenues, but both were still up year-over-year. Revenue for the quarter rose 15% to $1.5 billion, with Moody’s Analytics up 11% to $796 million and Moody’s Investors Service up 19% to $684 million. Additionally, net income for the quarter rose 38% to $340 million, or $1.86 per share, while operating expenses were virtually flat.

Moody’s has always enjoyed high operating margins due to strong cash flow and relatively low costs. Operating profit margin for the fourth quarter was 33.6%, up from 23.7% in the fourth quarter of 2022. The operating profit margin for the full year was 36.1%.

At year-end, Moody’s had free cash flow of $1.9 billion, up from $1.2 billion at the end of 2022. This allowed Moody’s to increase its dividend by 10% to 85 cents per share. If the dividend remains at this level throughout the year, this will be Moody’s’ 15th consecutive dividend increase.

Selling can create opportunities

Moody’s outlook for 2024 may also have caused Wednesday’s sell-off, but I don’t see that as too concerning. In fact, selling lowers the valuation into a better buy range.

The 2024 outlook may be lower than expected, but the numbers look solid. Revenues are expected to grow in the mid-to-high single digit range this year, essentially equivalent to 8% revenue growth in 2023. Diluted earnings per share are expected to be between $9.45 and $10.20 per share, an increase of 8% to 17% compared to 2023 and similar to last year’s peak growth rate. Additionally, operating margins are expected to increase up to 37% to 39% from 36.1% in 2023, and free cash flow is expected to be approximately $1.9 billion to $2.1 billion in 2023, roughly the same as $1.9 billion in 2023.

One area of ​​increase that investors may have been concerned about is operating expenses, which are expected to potentially increase by mid-single digits compared to last year’s 5% increase.

There is no need to worry too much about performance and prospects. Wall Street analysts have set a consensus price target for the stock at $407, so it’s expected to be another solid year. Ultimately, selling could create a buying opportunity for some, as the price-to-earnings ratio (P/E) is still a bit high at 44. It’s a good entry point for some investors.