MCO - Moody's Intrinsic value

I had written a piece about Moody's earlier this year and this is good time to revisit. It is well known that Moody's future business environment will not be the same as it's past. Some changes are

1. Increased regulation and legal exposure is inevitable. In essence the business will not enjoy as much regulatory and legal protection as before.

2. The profitable structured finance business is drying up and will not come back. After 2 years, management is expecting this part of business to have further declines.

3. We are in a period of long deleveraging cycle and low growth environment.

But, Moody's will still be a good highly (but less than pre-credit crisis) profitable business. It boils down to valuation.

But lets value the business. The earnings expectation for Moody's for 2010 is around$1.85. The current market price is between $25 to $26. It also has debt. This essentially means that the enterprise value is around $30 including debt. So, P/e based on enterprise value is around 16. This is not very high for a capital non-intensive company if future growth prospects are good. Warren Buffet is selling for the past few quarters and this can be justified only if he thinks future earnings prospects are not very good. There are enough uncertainities about future of credit rating agency but they have been very good cash producing machines. But deployment of this cash was not very great. Considering poor stock repurchase choices of the past, I expect minimal value creation based on allocation of capital.


Disclosure: I currently own Moody's and am thinking of selling.

Please leave your thoughts...