Moody’s Corporation (“Moody’s” or “the company”) is a major provider of credit ratings, as well as of a range of risk management products and services.
The credit ratings industry has found itself in the spotlight lately because it rated a large volume of mortgage-backed debt as investment-grade. The debt subsequently proved to be of much greater risk than the rating suggested. In addition, Moody’s itself came under fire for failing to correct an erroneous ratings model and thus knowingly maintaining incorrect ratings. These lapses have had inevitable consequences, with reputational damage probably the least of its worries. More disquieting are the proposed regulatory changes and the increased risk of litigation, as investors in troubled securities have lost large sums of money and are blaming the ratings agencies.
However, credit ratings are a necessary part of capital markets, and Moody’s is a very important player, so it is unlikely that the authorities would try to shut down the company or its ratings business – the SEC has already decided not to go that route. Moody’s also has a significant cash balance and the business generates strong cash flows, so litigation and any associated liabilities would most likely be absorbed without putting too much strain on the company’s financial stability.
Overall, barring any unexpected regulatory moves, the company’s prospects look good, and our valuation suggests that the company’s shares have a 9% appreciation potential. We therefore rate the company as a Buy with a target price of $32.53 per share.