Moody’s Works a Tough Regulatory Environment

Tuesday, 24 Apr 2012 05:43 PM

By Greg Brown

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Moody’s (MCO) is working in a tough environment, one in which its services are increasingly necessary but the work involved in meeting regulatory requirements could easily put a dent in income growth. Wall Street is positive on the stock, with some reservations about government unknowns.

Moody’s is a provider of credit ratings, credit and economic related research, data and analytical tools, risk management software, quantitative credit risk measures, credit portfolio management solutions, training and financial credentialing and certification services and outsourced research and analytical services to institutional customers.

Moody’s reports in two reportable segments: MIS and MA. The MIS segment consists of all credit rating activity. All of Moody’s other non-rating commercial activities are included within the MA segment.

MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide, including various corporate and governmental obligations, structured finance securities and commercial paper programs.

Revenue is derived from the originators and issuers of such transactions who use MIS ratings to support the distribution of their debt issues to investors. MIS had ratings relationships with approximately 11,000 corporate issuers and approximately 22,000 public finance issuers at the end of 2011.

The MA segment develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. MA customers represent more than 4,600 institutions worldwide operating in approximately 115 countries.

During 2011 Moody’s research web site was accessed by more than 226,000 individuals, including 28,000 client users.

Moody’s expects full-year 2012 revenue to grow in the high-single to low-double-digit percent range. The company expects diluted earnings per share for full-year 2012 in the range of $2.62 to $2.72.

“For the global MIS business, revenue for full-year 2012 is expected to increase in the mid-single-digit percent range,” Moody’s told investors in a recent filing.

“For MA, full-year 2012 revenue is expected to increase in the high-teens percent range both in the U.S. and outside the U.S. Revenue growth is projected in the mid-single-digit percent range for research, data and analytics and in the low 20s percent range for risk.”

Moody’s is a $9.25 billion market cap stock, higher than the average for diversified financial services at $6.82 billion. Its trailing 12-month P/E ratio is 16.63 compared to 13.08 for the sector. It has a projected five-year price-to-earnings-growth (PEG) ratio of 1.33.

The 12-month projected earnings per share growth is 11.19 percent, compared to 25.16 percent for the sector.

Weak half


Analysts are generally bullish on Moody’s, with buy or outperform ratings from Thomson Reuters/Verus, Piper Jaffray, and EVA Dimensions. Columbine Capital Services rates the stock at underperform.

“We believe that Moody s guidance is back-end loaded, which reflects a weak first half of 2012. Moreover, a continued rise in costs associated with higher regulation and compliance in 2012 will hurt profitability going forward,” report the analysts at Zacks Investment Research, which has the stock at neutral with a price target of $41.

“However, we believe that Moody’s remains a solid franchise in rating debt instruments based on its diversified credit research business model and international growth,” they wrote.

Moody’s next reports on April 26.

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