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RBC sees tailwinds for Info Services sector in 2025

EditorEmilio Ghigini
Published 03/12/2024, 01:16 am
MCO
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On Monday, RBC Capital Markets outlined the potential for a positive outlook in the Information and Commercial Services sector heading into 2025.

The firm highlighted several factors that could serve as tailwinds for the sector, including a recovery in capital markets, improved client budgets, and a return to normalcy in sales cycles and pricing.

Additionally, an anticipated uptick in IT demand, a PC refresh cycle, better employment numbers, and a slight improvement in consumer lending are expected to drive growth. The possibility of reduced corporate tax rates was also mentioned as a positive influence.

This optimistic outlook aligns with Moody's (NYSE:MCO) Corporation's recent performance, showing impressive revenue growth of 20.4% and a strong 26.4% price return over the past six months. InvestingPro data reveals 11 additional bullish indicators for MCO, available to subscribers.

Despite the optimistic forecast, the sector faces several challenges. The analyst pointed out that persistent high interest rates could hinder the recovery of mortgage and home sales.

Other headwinds include a moderating multifamily vacancy rate, difficult year-over-year comparisons for issuance, and potentially lower volatility affecting derivatives.

Government efficiency measures could also impact public sector spending. However, Moody's maintains a robust financial position with a healthy current ratio of 1.67 and strong profitability metrics, including a 72.9% gross profit margin.

The report also touched on long-term positive trends such as secular growth, enhanced cross-selling and upselling opportunities, and gains in wallet and market share. These factors are anticipated to contribute to operating leverage and, combined with normalized investments, could lead to margin expansion.

While significant monetization or efficiency benefits from General Artificial Intelligence (GenAI) investments are not expected in 2025, these investments are seen as potentially transformational over the medium term.

Companies with high leverage are expected to prioritize debt repayment, while others may focus on strategic mergers and acquisitions (M&A) and share repurchase programs. RBC Capital Markets named MSCI, Moody's Corporation (NYSE:MCO), Nasdaq (NASDAQ:NDAQ), S&P Global (NYSE:SPGI), and TransUnion (NYSE:NYSE:TRU) as its top stock picks for the sector in 2025. For the small-cap category, FactSet Research Systems Inc (NYSE:FDS). (NYSE:FA) was selected as the top idea.

In other recent news, Moody's Corporation has reported significant developments. The company's third quarter of 2024 saw a 23% increase in revenue, reaching $1.8 billion, and a 32% rise in adjusted diluted earnings per share. This robust financial performance was largely driven by the ratings business and transactional revenue, which surged by 70%.

Moody's has also expanded its lending suite with the acquisition of Numerated Growth Technologies, a loan origination platform for financial institutions. The integration of Numerated into Moody's offerings is expected to deliver a more robust solution for financial institutions navigating the digital lending landscape.

In analyst news, Baird has raised the price target for Moody's from $490 to $512, maintaining an outperform rating. The decision was influenced by Moody's Investor Service's excellent performance in the third quarter. However, Moody's Analytics showed a softer performance, viewed as a modest incremental negative by Baird.

Lastly, Moody's full-year ratings revenue growth guidance has been raised to the mid-30s percentage range, and adjusted operating margin expectations for the year are now set at 59-60%. Moody's adjusted diluted EPS guidance has been increased from $11.90 to $12.10, indicating a 21% growth from the previous year. These are among the recent developments shaping the company's trajectory.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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