Moody's Corp (MCO)

Death of the golden goose. --

Moodys = MCO
Look at the company
They got half their earnings from structured products.
Moving forward this is GONE.

Their huuuuuge premium built into the shares was because the company had a golden goose laying golden eggs all over the place.
There were only a few of these golden gooses.

Unfortunately for MCO, the current management has poisoned their golden goose. Credibility was the name of this goose.
Buffett has been mourning this tragic loss -

When you look at what is left....there is nothing. The goose has provided all the operational side of the business.

Management already dumped all their assets and took on huge amounts of debt to buy back bloated shares (at a price that was counting on the goose to live a long healthy life.)

The debt payments are going to continue to come....but unfortunately they have run out of golden eggs to sell to cover these incoming payments.

Add the uncertainty and cost and time of litigation ----- who in the world is buying this bloated crap ?
Maybe someone initiating a squeeze...but that is dangerous ground in my opinion.

There is no value here. Only an albatross of debt and calamity.

Can someone give me a single reason to buy this equity at this current valuation ?

I would love to hear some reasoning.

If you are delusional enough to want to own credit rating agencies...why would you ever buy MCO -vs- MHP....which has assets, a semi-competent management team, and a much more broad and diversified operational business.

MCO is the one short I have held from the $32 range.
All my other in the money puts - I take off when I get profits

These are hedges -vs- my 80% long portfolio which consists of stocks that trade at rational valuations relative to all the things that MCO lacks.

MCO has a liquidation value of around -$5 per share not counting any of this litigation, diminished credibility, and rapidly decreasing prospects for future revenues (let alone earnings)

Massive debt, loss of economic moat, unethical-untrustworthy-incompetent management, and now litigation out their ears.

I ask you again - what reason would you want to own this security ?

Give me a few reasons. I have given you plenty of mine for betting against this company.

(note - hedged some puts with at the money calls - and bought mhp calls for further hedging of this short position)

The rating agencies are going to have their business models trashed by the end of this credit crisis. It is a good thing.

Municipals that default once every 30 years get A-grade ratings. Packages of toxic no-doc mortgages get a AAA-rating. Most triple AAA rated debt is supposed to continue paying unabated until some perfect storm happens (i.e. 20% unemployment). In the case of foreclosures, all it took was a tick up to 1.5% deliquency to fall apart. The ratings agencies, like Moody's, are partially to blame for destroying their own credibility.

As for the hard numbers, like the CEO of Moody's said in their year end report, there is no visibility forward. The credit markets have slowed tremendously in their issuance of debt. The most profitable product from a ratings company stand point is low quality mortgage securitizations. Not many of those coming down the pipeline right now.

Wrote this on my blog:
Let's look deeper at the MCO purchase. I did a Discounted Cash Flow analysis on MCO yesterday, and I noticed somehting interesting.

Ticker: MCO
Growth in 10 years: 12.5%
Discount Rate: 12%
EPS: 2.58%
Long term Discount rate: 12%
Intrinsic Value: $66.90

What I did here was to find out what the expectations for earnings growth were given the current share price of $66 a share. Of course a couple of caveats should be in order there, due to the low-capex nature, I am using EPS as a proxy for FCF. Also, for discount rate, I am using 15% for small caps, 9% for Dow Components, and everything else is 12%. Long term rate at 5% is debatable, most guys would use 3 ~ 4%.

Using these assumption, I find that people are pricing MCO with an EPS growth of approximately 12.5%. Now, let's take a look at MCO's previous growth rates:

Revenue Growth %1-Year:17.6% 3-Years:17.8% 5-Years:20.6%
Operating Income 1-Year:34.0% 3-Years:23.8% 5-Years:25.9% .
Earnings/Share % 1-Year:40.2% 3-Years:29.3% 5-Years:31.4%

So given the strong historical growth, why are there so much pessimism on EPS growth ? I think there is a major sell off because of fears that the sub-prime blow-up will affect credit ratings company like Moody's and S&P. To quote a March WSJ article:

"
.....
At the same time, the stock prices of Moody's Corp. and S&P's parent, McGraw-Hill Cos., have taken a hit over concerns that turmoil in the subprime-mortgage market may spread to the broader credit markets and damp issuance of other types of debt products like collateralized debt obligations.

Moody's and McGraw Hill's shares are down 11% and 6%, respectively, since early February, versus a 1% fall in the S&P 500-stock index over the same period.

For years, the ratings companies reaped profits by charging issuers for rating bonds backed by home loans to borrowers with weak credit, known as subprime mortgages. Many Wall Street firms also followed guidelines from the ratings companies when they bundled loans together and sold billions of dollars in highly rated securities backed by them.

..."

Now, by taking a 1/3 position in MCO, I am betting that the impact to its Structured Finance business from the Sub-prime melt-down is going to be more than offset by

(a) the current activities in Private Equity/ M&A

(b) Global trend in debt issuance growing at 20% yoy for the past 5 years.

I am also making a wager that the EPS growth is definitely going to exceed 12.5% And while the sub-prime concerns are valid, I think the fears may be overblown.

raytoei

One of only two credit rating agencies. what a great moat. always trades at high multiples. Very profitable with great margins.

Consistent performer and a high growth potential market.

Will do well as interest rates decline.

There are central figure in the credit crisis. When the dust settles, there will be hearings in Congress with MCO sitting front and center. I predict a revamping and much more restriction on this industry. Can you saw lawsuits?!?!?!

Think of US private debt as a growth stock. As a leading debt rating service, MCO's business will piggyback the swelling debt burden.

A new Credit Rating Agency Reform Act has been proposed that seeks to reduce the regulatory hurdles necessary for firms looking to enter the industry. Currently, S&P along with Moody’s account for around 80% of the market share and are less bothered about the legislation. There seems to be fewer motives to pay a new player and Moody’s would enjoy the creditability arising out of its long history.

Moody’s revenue in 2006 increased 17.6% to $2,037 million supported by the diversity of the global fixed-income markets and strong European markets. Household borrowing and consumer asset origination volumes remained strong despite a slowdown in the housing market. The agency has been opportunistic in its share buybacks and would have definitely taken advantage with the stocks price taking a hit in the recent months.

Moody’s sees huge opportunities in global expansion accounting for 37% of the total revenues. In the recent year growth in the European regions have outpaced the U.S. operations growth and also looked into joint venture as an option taking 49% stake in China’s Chengxin International credit rating agency. Emerging markets account for 5% of the revenue pie and expects to increase the same for which it has opened an office in Dubai apart from the acquisition of PT Kasnic Credit Rating in Indonesia. Of late it has also turned its attention towards risk management and research operations. The company sees huge growth prospects with issuance growth and the complexity associated with the debt products.

Historically, Moody’s has had only one year of sales taking a negative dip and its business not being asset sensitive help it post strong cash flows. Financial health of the company looks solid which superior operating margins and other return metrics. Though the stock had a bad run with its price taking a hit beginning 2007, the worst seems to be over and all set to beat the market.

I just learned today that Berkshire Hathaway reduced their stake in the firm and that is more then enough to make a long-term bear out of me. I was already bearish on them and now I'm REALLY bearish. Buffet VERY seldom sells so if they are divesting, that is not a good sign.

I have to deal with the rating agencies in my line of work and I specifically have to deal with structured credit groups which is where this whole credit maelstrom is emanating from. Moody's is BY FAR the worst of all the rating agencies that I have to deal with. They have had mass layoffs and personnel exodus as a result of the crisis. The people who remain don't understand well what they've inherited and the mess they have to work with. They are a rudderless organization in my opinion.

Then there is the question of litigation risk, which is huge for this company right now as they have conflicts of interest galore. No matter what they do, they are definitely going to get sued, it's only a question of by whom and whether they will be successful defending themselves. The rating agencies all bear culpability in this credit debacle, but again, in my personal experience Moody's has done a worse job of managing this then anybody. They are also consistently off on their credit calls.

The government is out to make a scapegoat out of somebody and if you have to pick a rating agency to hang, it would be these guys over S&P or Fitch any day of the week. Those firms do a much better job of credit analysis and exposure management in my opinion. They also have much more talented people which will means a lot for long-term viability in times of crisis.

I join Greenlight Capital's David Einhorn and apparently Berkshire's Warrne Buffet in giving the thumbs down to Moody's!!

Moody's accused of issuing inflated ratings: report
On Wednesday September 23, 2009, 3:07 am EDT
.
(Reuters) - A former analyst with Moody's Corp (NYSE:MCO - News) has accused the credit ratings agency of issuing inflated ratings, and has taken his concerns to U.S. congressional investigators, the Wall Street Journal reported on Wednesday.

In a letter dated July, obtained by the paper, Eric Kolchinsky accused Moody's Investor Service of issuing a high rating to a complicated debt security in January, in spite of it being aware it was planning to downgrade assets backing the securities.

"Moody's issued an opinion which was known to be wrong," Kolchinsky wrote, along with detailing other instances of inflated ratings issuance, according to the paper.

The paper said a Moody's spokesman declined to comment on the January rating under scrutiny, but had said Kolchinsky refused to cooperate with an investigation into the issues he raised, and was suspended with pay.

Kolchinsky is scheduled to testify on ratings firm reform before the House Committee on Oversight and Government Reform on Thursday, the paper said.

Moody's was not available to comment.

(Reporting by Biswarup Gooptu in Bangalore; Editing by Dan Lalor and Chris Wickham)

Reputation damage as a result of improperly rating "investment grade" CDO tranches has not been fully priced into the stock. The credibility and relevance of its analysts and ratings are coming under greater scrutiny. Just as Buffet is entering the monoline's best business, new competition may seek to jump in to the historical moneymakers for Moody's. Unlike its counterpart McGraw-Hill, parent of Standard & Poors, MCO's business model is not well diversified.

MCO has been punished for not recognizing the derivative business and the subprime mortgage "packaging". Or maybe there is some other reason for large drop in share price. There are still only three rating companies and issuance of bonds and other debt will continue to require "objective' ratings which will be furnished by somebody. MCO has the best or at least one of the best franchises for this business and should regain its emminence and share price within a few years. Best for longer term investors.

These guys are protected by a moat of "credibility" and "respectability" created over the last 100 years. Difficult, even with legislation, to overcome those kinds of barriers--sort of like a chicken and the egg problem--can't get any ratings business without ratings experience and can't get any experience because you can't get the business. MCO is in what seems like a stable duopoly with S&P.

MCO does not have a lot of upside at the current price, but there is a MASSIVE downside if they are found liable for the AAA bond rating for SIVs and other asset backed securities. So far it looks like it is a distinct possibility.

I am shamelessly following Breaker Dave into this beaten down all-star. One of the few companies that is trusted to assign ratings to bond issues, this high margin business is not going away due to the credit crunch. At a 50% discount the market offers us a tempting entry point which will still look good when the credit crisis is a fading memory.

good value. good management. services will continue to expand in the international market.

Moody's is ludicrously profitable: operating margins typically exceed 50%. Though it's well run, this is mainly a function of the credit rating industry structure -- an anti-competitive duopoly with Standard & Poors. Expect legislative and regulatory change in the next couple of years.

Aging baby boomers will move more and more investment assets to bonds, increasing demand for bonds. Bond issuers will take advantage of demand (and corresponding relatively low interest rates) to issue more bonds. Moody's will reap continuing high margins from rating new bonds as part of duopoly with S&P. Congress's attempts to bring more competition to bond rating agencies might work, but Moody's and S&P will dominate for many years to come. If you were a bank and needed a bond rating would you trust someone who's done it for a hundred years or Joe Blow's Bond Ratings that just opened up last year?