In a context of continued demand for financial services and increasing incorporation of digital technology, the financial sector presents strong and promising prospects. The prevailing high interest rate environment provides additional stimulus to financial services companies. With financial services firms Moody’s (MCO) and First American Financial (FAF) due to release their quarterly results soon, we compare financial services stocks and ascertain which of the two holds the edge in terms of earnings. Read on to find out….
The financial services sector is set to undergo significant expansion due to significant demand from businesses and the increasing integration of cutting-edge technologies. Banks, insurance companies, brokerage entities and money management institutions could further benefit from the high interest rate environment.
This article evaluates and compares the fundamentals of financial services companies, Moody’s Corporation (MCO) and the first American financial company (FAF), to ascertain which is best equipped to capitalize on the industry’s burgeoning momentum as these stocks prepare for quarterly earnings releases.
Historically, the financial services sector has often been a catalyst for progress, helping individuals and organizations navigate socioeconomic changes. Service providers in the financial services sector, such as insurance, investment management, banking and capital markets, are well positioned to remain resilient and experience notable long-term growth, fueled by growing business demand for financial services .
Interest rates, currently set between 5.25% and 5.5%, are expected to remain high for a few more months before the expected rate cuts begin. Financial services industry revenues are positively correlated with higher interest rates. High interest rates force borrowers to pay more interest, thus creating a potential avenue to increase revenue for these servicers.
Additionally, the continued digitalization of financial services such as credit card processing, preferential credit, insurance coverage, tax accounting methodologies, wealth management, mortgage financing, and “Buy Now Pay Later” (BNPL) solutions have induced a paradigm shift in the financial sector.
From a technological perspective, financial companies plan to take advantage of the cutting edge GenAI technology for better fraud detection and in-depth analysis of customer behavior. This development can, in turn, further support the growth of the sector.
The financial services market is expected to grow from $31.14 trillion in 2023 to $33.54 trillion in 2024 at a CAGR of 7.7%. The market is expected to witness stronger growth, reaching $44.93 trillion in 2028growing at a CAGR of 7.6%.
With a market capitalization of more than $73 billion, MCO operates as an integrated risk assessment firm worldwide. Meanwhile, FAF, with a market capitalization of $6.25 billion, is a leading provider of title, settlement and risk solutions for real estate transactions and a leader in the digital transformation of its industry.
Fourth quarter results for both MCO and FAF will be revealed soon. MCO’s revenue and EPS are expected to increase 15.3% and 44.9% year-over-year to $1.49 billion and $2.32, in the fiscal fourth quarter ended December 2023, while FAF’s revenues and EPS are expected to decline 10% and 39% year-over-year. year at $1.52 billion and $0.82, respectively.
In terms of price performance, MCO has gained 30.7% over the past nine months, while FAF has gained 5.9%. However, over the past year, MCO gained 21.3% to close the latest trading session at $399.60, while FAF lost 5% to close the latest trading session at $60.57. MCO is a clear winner here.
Here are the reasons why I think MCO could perform better in the short term:
Recent financial results
MCO’s revenue for the fiscal third quarter ended September 30, 2023 was $1.47 billion, up 15.5% year-over-year, while its adjusted operating profit grew 32.2% over to the prior year quarter to $657 million.
The company’s adjusted net income and adjusted EPS increased 31.5% and 31.4% from the prior-year quarter, to $447 million and $2.43, respectively. For the nine months ended September 30, 2023, free cash flow increased 65.3% year over year to $1.48 billion.
In contrast, FAF’s net sales totaled $1.48 billion during the fiscal third quarter ended September 30, 2023, reflecting a decline of 18.8% year-over-year. Adjusted net income and adjusted net earnings per share stood at $128.20 million and $1.22, down 27.5% and 27.4%, respectively, from the same quarter of the year last.
However, FAF’s cash and cash equivalents, as of September 30, 2023, were $1.58 billion, compared to $1.22 billion as of December 31, 2022.
Past and expected financial performance
MCO’s revenues have grown at a CAGR of 4.7% over the past five years, while FAF’s revenues have grown at a CAGR of 1.5% over the same period. MCO’s EBITDA and EBIT have grown at a CAGR of 2.6% and 1.3%, respectively, over the past five years, while FAF’s EBITDA and EBIT have grown at a negative CAGR of 5.8% and 9.5%.
Analysts expect MCO’s revenue to increase 9% year-over-year to $1.60 billion in the fiscal first quarter ended March 2024, while EPS is expected to come in at $2.82. The company has surpassed consensus estimates for revenue and EPS in each of the trailing four quarters, which is impressive.
FAF’s revenue is expected to decline 1.2% year-over-year to $1.43 billion, while EPS is expected to increase 47.2% year-over-year to $0.72 in the fiscal first quarter ended March 2024. The company beat consensus EPS estimates in three of the cases. in the trailing four quarters, while failing to beat consensus revenue estimates in three of the trailing four quarters.
Profitability
MCO’s trailing 12-month EBITDA margin of 42.80% is higher than FAF’s 9.66%. Furthermore, MCO’s trailing 12-month return on total capital is 12.11% and is higher than FAF’s 3.91%. Furthermore, MCO’s trailing 12-month total asset return stands at 11.87% and is higher than FAF’s 2.22%.
Therefore, MCO seems more profitable.
POWR Ratings
MCO has an overall rating of B, which equates to a buy in our property POWR Ratings system. In contrast, FAF has an overall rating of C, which translates to Neutral. POWR ratings are calculated by considering 118 different factors, with each factor weighted optimally.
Our proprietary rating system also evaluates each security based on eight distinct categories. MCO’s B quality grade is in sync with its above-industry profitability metrics. Its trailing 12-month EBIT margin of 36.43% is 71.9% higher than the industry average of 21.20%. Additionally, trailing 12-month CAPEX/Sales of 4.84% is 138.8% higher than the industry average of 2.03.
In contrast, FAF’s C grade for quality justifies its mixed profitability. Its trailing 12-month EBIT margin of 6.76% is 68.1% lower than the industry average of 21.20%. However, trailing 12-month CAPEX/Sales of 4.41% is 117.7% higher than the industry average of 2.03.
Inside the Financial Services (Enterprise) sector, MCO is ranked 12th out of 100 stocks, while FAF is ranked 41st.
In addition to the above, we also evaluated both stocks in terms of growth, value, momentum, stability and sentiment. Click here to view MCO ratings. Get all FAF ratings Here.
The winner
As we move deeper into the digital age, witnessing a marked surge in advanced technologies, the financial services sector stands on the brink of unprecedented growth and expansion. High interest rates are set to further bolster this performance, potentially increasing profitability for industry operators. MCO and FAF industry players could benefit from these industry-friendly factors.
However, MCO particularly stands out with its profitability, promising outlook, vigorous financial health, and encouraging profit forecast, making it the most advantageous pick now.
Our research shows that your odds of success increase when you invest in stocks with an overall rating of Strong Buy or Buy. View all the highest rated stocks in the Financial Services (Enterprise) sector Here.
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MCO shares closed at $399.60 on Friday, down -$2.94 (-0.73%). Year to date, MCO has gained 2.31%, compared to a 4.01% gain in the benchmark S&P 500 index over the same period.
About the author: Sristi Suman Jayaswal
Stock market dynamics piqued Sristi’s interest during her school days, leading her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her favorite strategy. After earning a master’s degree in Accounting and Finance, Sristi hopes to deepen her expertise in investment research and better guide investors.
Moreover…
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