It’s very unlikely anyone will forget the housing bubble, and subsequent financial crisis, anytime soon. And for good reason. There’s plenty of blame to go around. 

#-ad_banner-#This includes the credit rating agencies. All three of the major rating agencies in the U.S. are thought to have played a key role in helping create the housing bubble. Their key crime? Inflating ratings on mortgage-backed securities.

Over half a decade later, some investors are still shunning the credit rating agencies. But not Warren Buffett. He and Berkshire Hathaway (NYSE: BRK-B) are Moody’s Corp.’s (NYSE: MCO) largest shareholder, owning 12% of the company.
 
Moody’s took one of the hardest hits following the bursting of the credit bubble. In less than two years, the company’s market cap shrank nearly 75%.

One reason that Moody’s fell so hard was that three-quarters of the mortgage-backed securities it rated AAA in 2006 were rated junk by mid-2010. 

Still, Buffett held on through all Moody’s struggles. Buffett has been an owner of Moody’s since 2000. He sold some shares in 2009, but only to raise money for his buyout of railway company Burlington Northern Santa Fe.

Shares of the company are back up to $80, more than quadruple from where they were in 2009. But there’s still plenty of upside left for investors.

Moody’s generates nearly two-thirds of its revenues from its core credit rating service. Moody’s Investors Service is heavily tied to credit ratings on debt securities.

Although 2013 was a great year for corporate debt issuances in the U.S., Europe and emerging markets could be key for Moody’s going forward. Moody’s generates over 45% of its revenue from outside the U.S. With rates still low in other developed economies, the demand for debt financing should remain strong in these markets — which means more debt for Moody’s to rate. 

The other third of its revenue is generated from its Moody’s Analytics business, which includes credit risk processing and credit risk management products. The analytics business doesn’t have a correlation to interest rates and the amount of debt being issued, so Moody’s is looking to increase its exposure to this part of the market. That should result in a steadier revenue stream.

It takes a lot of money and a strong reputation to build a credit rating agency. Thus, the barriers to entry are fairly high and give Moody’s a sustainable moat. And thanks to this, Moody’s is able to consistently generate high levels of free cash flow. Over half of Moody’s revenues are recurring, and the company has been putting its free cash flow to work for investors.

Moody’s pays a 1.4% dividend yield — but over the past decade, it never cut its annual dividend payment, and it failed to increase it in only one year. In 2013, Moody’s increased its annual dividend payment by 40%. And its dividend payout ratio is just 25%, meaning there’s plenty of room for continued dividend growth.

Last year, Moody’s returned over $890 million to shareholders through share repurchases. Management plans on increasing that buyback number to $1 billion this year, which would be close to 6% of its current market cap. The balance sheet remains fairly strong: Moody’s has over $2 billion in cash, which is equal to 12% of its market cap and enough to cover all the company’s debt.
 
As far as valuation goes, Moody’s is trading at a trailing price-to-earnings (P/E) ratio close to 22. Before the financial crisis, Moody’s was trading at a P/E between 25 and 30. And Moody’s still trades on the lower end of the industry: Morningstar (Nasdaq: MORN) trades at a P/E ratio of 28.5, Equifax (NYSE: EFX) at 25.4, and McGraw Hill Financial (NYSE: MHFI) at 26.3.

Risks to Consider: One of the biggest risks lies in the economic environment, which can impact the amount of debt securities being issued. This would lower the demand for credit ratings. Furthermore, since the credit crisis, Moody’s and other rating agencies have seen an increase in regulatory scrutiny. Increased regulation could also have an impact on Moody’s and lead to increased operating expenses.

Action to Take –> Buy Moody’s for upside to $100. That’s over 20% upside, based on the assumptions that Moody’s merely maintains its current P/E ratio of 22 and meets 2015 expected earnings of $4.50 a share.

P.S. Just as Moody’s is looking to overseas markets for growth, investors hunting for yield can do the same. In fact, nearly 80% of the world’s highest-yielding stocks come from outside the U.S. That’s why we’ve created a special report that tells you everything you need to know about international high-yielders — including names and ticker symbols of some of our favorites. Click here to learn more.