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Chris Davis Sells Out of Moody's (MCO) and Reduces Dun & Bradstreet (DNB)

July 12, 2011 | About:
Holly LaFon

Holly LaFon

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Chris Davis is portfolio manager of Davis Advisers, a firm founded 40 years ago which has $100 billion in assets and whose Davis New York Venture Fund boasts an 11.8% return rate since inception. In July, he sold out of his position in credit ratings agency Moody’s (MCO) and reduced his position in Dun & Bradstreet (DNB). Davis picks stocks of durable businesses that sell at value prices and holds them for the long term. Because he intends to keep investments for the long run, he only includes stocks in his portfolio that he believes have the financial strength to withstand the vagaries of the market as well as grow earnings consistently.

Moody’s Corp. (MCO)

On July 8, Chris Davis sold his entire stake in Moody’s Corp., possibly due to uncertainty of the future of ratings agencies. Davis Funds has owned Moody’s stock since at least 1999 when it cost about $12 – 13, and picked up more shares when it fell to low points in the $20 range in 2009. He reduced 77.7% of his holdings in the first quarter 2011 at about $30.60 per share. The stock has risen 41.7% year to date to $37.60, making this a profitable exit for him.

Moody’s Corp. is the holding company for Moody’s Analytics and Moody’s Investor Services, which assigns credit ratings to world bond issuers and borrowers, and performs research and analysis of financial markets, businesses and government entities. Moody’s Corp. employs about 4,500 people and operates in 26 countries.

From 1990 to 2000, the number of countries Moody’s covered rose from 33 to 100. A downgrade of a country’s bond rating by Moody’s, which has a 40% credit ratings market share, has the power to profoundly affect it economically and politically. Many feel their ratings are at times making the weak economy worse.

For instance, ratings agencies are having a destabilizing effect on the already fragile economy of Europe, which has upset government leaders. Last week, Moody’s downgrade of Portugal’s debt to “junk” status provoked market panic and a member of the European Commission on Internal Mark and Services to tell La Tribune this week that, “One of the weaknesses of the financial system is that it relies too much on ratings.” He recommended a ban on all ratings of countries receiving financial aid.

In addition, regulations already pending from the SEC would force CRAs to explain their ratings with broader background information and file a yearly report with the SEC, among other things. The new rules should be finalized by late July.

Moody’s has generated consistent cash flow over the last 10 years, including $574 million in 2010, up from $553 in 2009. It has a market cap of $9 billion, and a PE, PB and PS ratio of 16.98, 0 and 4.42, respectively.

As a shareholder of Dun & Bradstreet, Buffett received shares of Moody’s when it spun off in 2000. He held 48 million shares valued $499 million that year. Since third quarter 2009, when he owned 39,219,312 shares, he has been trimming his position in the company. By first quarter 2011 his ownership had dwindled to 28,415,250 shares.

Dun & Bradsheet Corp. (DNB)

In addition, on July 8 Davis reduced his holdings of Dun & Bradsheet Corp., a business information company with a 170-year history, by 48%. Moody’s was a part of Dun & Bradstreet before it became a separate entity through a spinoff in 2000. He has held DNB since at least the second quarter of 2006, at an average price of $73.58 and most recently sold for $75.44. DNB has fallen 6.65% year to date.

Dun & Bradstreet has a global database of 130 million companies and covers businesses in 190 countries. It operates in three segments: D&B Risk Management Solutions™ (drives 63% of revenues), D&B Sales & Marketing Solutions™ (29% of revenues), and D&B Internet Solutions™ (7% of revenues).

About 25% of the company’s profit is derived from its international operations, a fraction which has grown 5% in the last five years as North American profit has declined 5%. Core revenues increased 3% in 2010, primarily due recent acquisitions and increased purchases from international markets, and partially offset from lower customer purchases in general due to a weak economy and budgetary pressures.

DNB’s cash flow has not fluctuated significantly in a decade, in growth or otherwise, most recently amounting to $310 million in 2010, a decrease from $380 million in 2009, but higher than any year from 2001 – 2006. The company began paying dividends in 2007 and has increased them every year since. All executives at Dun & Bradstreet are required to own a certain level of the company’s stock in order to ensure that their own interests as partial owners are aligned with other shareholders.

Most of DNB’s challenges at present are their declining operating margins, which fell from 34% in 2008 to 28.5% in 2010, and net margins, which fell from 18.9% in 2009 to 15% in 2010. Also, increasing competition, particularly from overseas, could erode DNB’s market share, force them to reduce prices, and continue to weaken margins.

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