Moody’s Corp. (MCO, Financial) is a leading provider of credit ratings on fixed-income securities. The company's ratings segment, known as Moody’s Investors Service or MIS, includes corporate bonds, structured finance, financial institutions and public finance ratings. The segment represents a majority of the company’s revenue and profits.
Its other segment is Moody’s Analytics, which is a global provider of data and information, research and insights and decision solutions. These services help companies make better and faster financial decisions. The analytics segment leverages its industry expertise across multiple risks such as credit, market, financial crime, supply chain, catastrophe and climate to deliver integrated risk assessment solutions that enable corporations and other entities to identify, measure and manage the implications of interrelated risks and opportunities
Moody's Investors Service publishes and distributes credit ratings and provides assessment services on a wide range of debt obligations, programs and facilities and the entities that issue such obligations in markets worldwide, including various corporate, financial institution and governmental obligations, and structured finance securities. A rating from MIS enables issuers to create timely debt issuance strategies with the ability to capture wider investor focus and deeper liquidity options.
Moody's was founded in 1909 and currently has a market capitalization of $60 billion. Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) owns 13% of the company.
Financial review
Moody’s has been producing stellar financial results during this highly liquid and easy lending bull market. It’s eerily reminiscent of the 2006-07 time frame of collateralized loan obligation and collateralized debt obligation fame. Nonetheless, growth has been strong as revenue increased 16% in 2021 and 11.2% in 2020.
The company is a high-margin business in good times. Operating margins in 2021 were 45.7% and 44.4% in 2020. Net income margins were an astounding 35.6% in 2021 and 33.1% in 2020.
The economist in me wants to know how that’s possible. Well its almost a duopoly, but technically an oligopoly with only three competitors in the bond rating industry. Corporations and government entities need their bonds rated in order to sell them to the institutional investor world, and they don’t have many choices in the matter.
Valuation
Analyst consensus estimates for Moody's are approximately $12 for 2022 and $13.80 for 2023. A current price-earnings ratio of 27 and an enterprise value/Ebitda ratio of over 20 seems excessive at this stage in the economic cycle.
During the financial crisis in 2008, revenue declined 22% and net income declined 28%. When the capital markets freeze up and bond issuance declines, Moody’s revenue will likely weaken as it has in the past.
Guru trades
Gurus who have added Moody's positions recently include Chuck Akre (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio). Gurus who have reduced their positions include Robert Olstein (Trades, Portfolio) and Arnold Van Den Berg (Trades, Portfolio).
Conclusion
Moody’s stock appears to be priced for perfection. In other words, strong economic growth and no corporate liquidity issues for the foreseeable future. At this late stage in the economic cycle, that may not be an accurate forecast.
In 2007, the then-CEO of Citigroup (C, Financial), Charles Prince, told the Financial Times that the real estate party would end at some point. But he said there was so much liquidity it would not be disrupted by the turmoil taking place in the U.S. subprime mortgage market.
“When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing,” he said.
Well, the music did stop and Citigroup stock fell 95% from its highs.
Lower valuation levels for Moody's may be prudent to create a margin of safety.
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