Despite the residual warts from the financial crisis of 2008, credit rating agency Moody's (MCO) still boasts a lucrative, high-moat business. As one of the "big three" ratings firms, Moody's controls around 40% of the market for debt ratings, a position that gives the firm ample cross selling opportunities among its user base. With interest rates sitting near zero right now, debt issuances are up as firms make the prudent choice of refinancing debt loads at higher rates. That gives Moodys a steady stream of business to keep up with now.
The regulatory and public scrutiny that Moody's faced in the wake of 2008 provided some good lessons for management, making it much less likely that MCO will make the same mistakes twice. Moody's business extends beyond debt ratings; like its peers, the firm also sells research and quantitative databases, products that (like ratings) are capital-light and produce impressive margins. In many ways, Moody's dominance has held because it's one of the only games in town, and that edge is a big plus for investors.
Financially, Moody's is in good shape. The firm maintans a balance sheet that's nearly debt-neutral, and the firm operates in a high net-margin business with few major capital costs.
As momentum drags shares of MCO higher in 2014, investors should continue to get rewarded for their patience.