Moody’s Corporation (“Moody’s”) (NYSE: MCO)
Market Cap: $18.7 billion (as of 6/30/14)
Founded in 1900, Moody’s (MCO) is a global provider of credit rating opinions, insight, and tools for financial risk measurement and management. The company has two reporting segments: Moody’s Investor Services (the ratings business, 70% of revenue) and Moody’s Analytics (30% of revenue, includes credit and economic analysis subscriptions, risk analytics, financial and regulatory compliance tools, and certification services). We consider Moody’s ratings business a quintessential “toll-bridge,” earning fees from debt issuers of all kinds to provide efficient access to the debt capital markets.
Akre Focus Fund Investment:
Our initial investment in Moody’s was made in January of 2012 and we have added as periodic headline events - litigation, regulation (often overblown or misunderstood) - have presented opportunities to add to our investment at attractive valuations. As of June 2014 Moody’s represented 8.3 % of the portfolio.
Moody’s ratings business is exceptional, with proven pricing power, tremendous barriers to entry, high margins (operating margin averaged 46% from 2008 to 2012), and requires little investment capital to grow. Following the 2008 financial crisis, Moody’s was widely criticized for its role, for reasons both real and perceived. Investigations, litigation, and regulatory reviews ensued and Moody’s stock price plummeted. Our thesis deviates from popular perception in that we consider Moody’s global dominance and the oligopolic structure of the ratings industry to be the result of market forces, not regulation. We believe that those same market forces will see Moody’s through the post-crisis period with its “toll-bridge” status intact along with the potential for continued upward revaluation of the stock.