Amid increasing borrowing costs, loading up on fundamentally strong and qualitatively superior financial service stocks, Moody’s Corporation (MCO), BB Seguridade Participações S.A. (BBSEY), and Forrester Research Inc. (FORR) 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)
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.
MCO’s stock has gained 6.8% over the past month and 12.9% over the past six months to close the last trading session at $359.25.
MCO’s POWR Ratings reflect its robust outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MCO also has B grades for Stability, Sentiment, and Quality. It is ranked #11 among 100 stocks in the Financial Services (Enterprise) industry.
Click here for additional ratings for MCO’s Growth, Value, and Momentum.
BB Seguridade Participações S.A. (BBSEY)
Headquartered in Brazil, BBSEY is controlled by Banco do Brasil SA. The company operates in the insurance sector through two segments: Insurance and Brokerage.
During the first quarter of fiscal year 2023, BBSEY’s operating income increased by 42.3% year-over-year to R$2.19 billion ($461.52 million), while its gross income increased by 43.5% year-over-year to R$2.14 billion ($450.99 million).
Hence, with strong commercial performance of insurance, pension plans, premium bonds segments, loss ratio improvement, and financial results growth, BBSEY’s net income increased by 51.5% year-over-year to R$1.83 billion ($385.66 million).
BBSEY’s trailing-12-month EBITDA and net income margins of 94.58% and 81.74% are significantly higher than the industry averages of 20.63% and 25.71%. Moreover, the company’s trailing-12-month ROCE, ROTC, and ROTA of 72.12%, 52.15%, and 46.31% are also higher than the respective industry averages.
Ahead of its earnings release on August 7, analysts expect BBSEY’s revenue and EPS for the second quarter of the fiscal year 2023 to increase by 26.9% and 38.5% year-over-year to $416.27 million and $0.18, respectively. Moreover, the company has impressed by surpassing consensus EPS estimates in each of the trailing four quarters.
For the entire fiscal both revenue and EPS are expected to increase by 31.8% and 26.8% year-over-year to $1.88 billion and $0.73, respectively.
The stock has gained 5.9% over the past month and 14.5% year-to-date to close the last trading session at $6.64. In terms of forward P/E multiple, the stock is currently trading at 9.10x, which is 7.6% below the industry average. This indicates further upside potential for the stock.
BBSEY has an overall rating of B, which equates to a Buy in our POWR Ratings system. It also has B grades for Stability, Momentum, and Sentiment.
BBSEY is ranked #10 of 100 stocks in the Financial Services (Enterprise) industry. Click here for additional POWR Ratings for BBSEY’s Growth, Value, and Quality.
Forrester Research Inc. (FORR)
FORR is an independent research and advisory services firm that sells its products and services through a direct sales force in various locations in the United States, Europe, the United Kingdom, Canada, the Asia Pacific, and internationally. The company operates through three segments: Research; Consulting; and Events.
On June 5, FORR introduced two new research services, Forrester Decisions for Revenue Operations and Forrester Decisions for B2B Sales.
The former is designed to help B2B leaders across marketing, sales, and revenue operations align internal operations that maximize customer value and drive higher revenue and profitability. The latter is meant to help sales executives and leaders across sales enablement, revenue enablement, customer success, and channel sales drive scalable and sustainable revenue growth.
For the fiscal first quarter that ended March 31, 2022, FORR’s total revenues came in at $113.67 million, while its adjusted income from operations came in at $7.48 million. As a result, FORR’s adjusted net income for the quarter came in at $5.14 million or $0.27 per share.
FORR’s trailing-12-month gross profit margin of 58.25% is higher than the industry average of 29.96%. Moreover, its trailing-12-month return on total capital (ROTC) of 6.08% is higher than its 5-year average of 5.81%.
Ahead of its earnings release due today, analysts expect FORR’s revenue and EPS for the second quarter of the fiscal year to increase sequentially by 13.5% and 170.4% to $128.99 million and $0.73, respectively. Moreover, the company has exceeded consensus EPS estimates in three of the trailing four quarters.
The stock has gained 6.6% over the past month to close the last trading session at $31.39. At forward P/E and EV/EBITDA multiples of 14.85 and 8.79, which are 17.4% and 21.5% below the respective industry averages of 17.98 and 11.20, there is potential for further upside in the stock.
FORR has an overall rating of B, which translates to a Buy in our POWR Ratings system. It has an A grade for Quality.
FORR is ranked #8 in the same industry. Click here to see additional POWR Ratings for FORR’s Growth, Value, Momentum, Sentiment, and Stability.
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MCO shares were trading at $353.96 per share on Thursday afternoon, down $5.29 (-1.47%). Year-to-date, MCO has gained 27.69%, versus a 20.78% rise in the benchmark S&P 500 index during the same period.
About the Author: Santanu Roy
Having been fascinated by the traditional and evolving factors that affect investment decisions, Santanu decided to pursue a career as an investment analyst. Prior to his switch to investment research, he was a process associate at Cognizant. With a master's degree in business administration and a fundamental approach to analyzing businesses, he aims to help retail investors identify the best long-term investment opportunities.
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