About Moody’s Corporation
In the world of finance, Moody’s Corporation is a very important, prestigious institution.
From receiving hefty fines during the 2007-2008 financial crisis involving the way in which it went about rating certain, more speculative securities being distributed during the housing crisis to wielding a lot of power to companies and entities all across the globe through its offered services and expertise, New York City-based prominent ratings agency Moody’s Corporation is a very interesting company in a very interesting line of work.
Allow us to explain.
Moody’s Corporation is one of the world’s largest business credit rating agencies in the world, specifically meaning that instead of analyzing an individual’s credit and ability to pay back their outstanding debt(s), its services focus on rating businesses, such as publicly traded companies and the securities they issue (bonds, mainly) given the data and research those within the company have performed.
With that, Moody’s has its own published rating system on a sort of slightly more complex “A,B,C” scale, through which it rates the securities it is asked and paid to rate.
After all, that is the main way in which Moody’s makes its money.
While it’s certainly not a bad business model as we view it as being fairly recession proof, it is worth noting that the ethical implications are skewed and the incentives are hardly aligned in this business, at least from where we stand.
Let’s say a publicly traded company approaches Moody’s (bear in mind this is a completely hypothetical, fictitious example) and wishes to use its premier credit rating services to assign a public rating to the bonds it is considering issuing to the public.
Let’s continue with this example and say Moody’s takes on this new assignment and client and after performing a lot of thorough research on their part, it thinks it would be most appropriate to give its client’s bonds a rather poor rating, as Moody’s doesn’t think (objectively speaking) the company will be able to pay back this new debt it is about to issue to the public.
Throughout the rest of this process, who is to say that this seemingly risk-filled company doesn’t offer to give Moody’s some extra money under the table and in return, give the bonds a better, undeserved rating that will be more attractive to its future bondholders?
We’re not specifically saying this has happened or that it does happen today, however, the initial misalignment of interests can easily lead to bad actors conspiring and making decisions in their own interests and not of the investing community at-large.
It’s just something to chew on.
Anyways, now that some of the ground has been laid regarding Moody’s Corporation, its line of business and some of our general thoughts regarding a few of these aspects, let’s get right into the company’s numbers so as to eventually slap on an objective rating on its stock as a potential long-term investment.
Moody’s’ stock financials
Moody’s, being a $61.58 billion company at the time of this writing, has a share price of $335.69, a price-to-earnings (P/E) ratio of 43.37 and issues its shareholders an annual dividend of $3.08.
Given this preliminary information, Moody’s stock (NYSE: MCO) seems to be a bit ahead of itself in terms of share price value and intrinsic value given that its price-to-earnings ratio is healthily above that of the generally accepted fair value P/E benchmark of 20, standing at over double this benchmark.
This isn’t the absolute worst but it certainly isn’t the best, especially since, upon initial thought, at least, we don’t see many readily available growth levers for an established ratings agency such as Moody’s to pull in order to generate enough growth that justifies this price-to-earnings ratio.
Keeping that in the back of our minds for now, Moody’s’ executive team is responsible for around $14.3 billion in terms of total assets along with nearly $11.9 billion in terms of total liabilities, which to us, seems a little high given its services.
Thankfully, however, upon further review the majority of this total amount of liabilities is tangled up in the “total long term debt” category (which is around $7.4 billion, according to TD Ameritrade’s platform), so as long as Moody’s stays sharp on its own outstanding debts and other liabilities in the years and decades to come, we’re not as concerned as we initially were.
As it relates to the company’s income statement and more specifically, its total annual revenues over the last handful of years, Moody’s’ have stayed consistent for the most part, experiencing a gradual rise from around $4.4 billion in 2018 to $6.2 billion in 2021, however, between 2021 and 2022 the company’s revenue did soften a bit, slipping slightly to nearly $5.5 billion in 2022.
We attribute this drop as being a result of not as many companies looking to raise capital through the debt markets, as it is more than likely that many, many companies, small and large, were looking to find ways in which they could viably finance their operations and stay alive during COVID-19 and one of the primary ways a company can do this is by entering the debt (bond) market.
To get the rating in order to issue their bonds and raise capital, however, an agency such as Moody’s comes into play as it is deemed as a necessary supplier of the rating(s) of said bonds.
Simply put, the demand for raising capital might be cooling off at the moment, however, we cut Moody’s some slack because 2020 and 2021 were extraordinary circumstances for all parties involved.
Touching base on this company’s cash flow statement, Moody’s has had no issue whatsoever in generating and maintaining consistent and positive net income and total cash from operations (again, since 2018), which frankly is something we expected to be the case given the nature of this company’s business and operating environment, but nevertheless we are happy that we weren’t surprised.
Moody’s’ stock fundamentals
Carving out a considerable amount of total cash from one’s operations is usually a byproduct of a company having a relatively strong trailing twelve month (TTM) net profit margin.
At least, this is most definitely the case with Moody’s Corporation.
For instance, according to the figures displayed on TD Ameritrade’s platform, the company’s TTM net profit margin towers over the industry’s average of 15.41% to its own TTM net profit margin of 26.31%, which is partially due to its vast amount of market share in the ratings space but also speaks to the company’s pronounced efficiencies and capital discipline and strategic deployment thereof.
We certainly give our props to Moody’s in this regard.
Finally, with respect to its TTM returns on assets and investment(s), Moody’s’ also tops that of the industry’s respective averages, at impressively high measures, we might add.
For example, the company’s TTM return on assets stands at 9.67% to the industry’s listed average (on TD Ameritrade’s platform) of -7.6%.
To us, this is yet another indicator that Moody’s is operating a well-oiled, capital efficient machine.
Should you buy Moody’s stock?
Many of this agency’s core metrics, ratios and financials are more than solid, however, valuation is something that is just plain difficult for us to get our heads around, especially in this current frothy market environment.
Paying nearly 44 times earnings for a boring, established financial institution that is likely to remain steady in its business prospects for the foreseeable future is just a bit too rich for our blood.
Until this company’s stock (NYSE: MCO) comes down to a more realistic, digestible valuation, we can’t see ourselves getting thrilled to overpay for Moody’s’ stock anytime soon while it’s floating near all-time highs, even though it is in fact in a great line of business.
With our concerns being primarily rooted in the company’s currently lofty valuation, we give the company’s stock a “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.