Moody's CorporationMCO

Morningstar Rating

Stock Research and Analysis

by Bill Bergman

Moody's has long reaped the benefits of a lucrative competitive position, cemented in part by regulatory glue. Its credit rating and financial research businesses generated operating profit margins averaging a sky-high 51% in the 10 years ended 2008. Read more

Bulls Say

Moody's basic credit research services are still valued in the marketplace, and the intellectual capital the firm has developed will likely allow it to survive structured finance missteps in recent years.

Most debt products are required by regulation to have two independent ratings, and both debt issuers and investors want to use as few rating agencies as possible. Debt issuers want to limit their time spent with credit analysts, and investors favor fewer voices to many.

Moody's has established a joint venture in China by taking a 49% stake in China Chengxin International Credit Rating Agency, the leading domestic credit-rating agency. While this deal will have minimal impact on financial results for several years, it is an example of the company's international growth opportunities.

The credit-rating business is not asset-intensive, and free cash flow in relation to reported net income is very strong. Read more

Bears Say

The accuracy of the company's ratings on residential mortgage-backed securities and credit derivatives has come under fire. The Moody's brand is important in winning new business, and missteps that tarnish that image limit the company's growth potential.

If the Securities and Exchange Commission increases or fundamentally alters the regulatory treatment of credit-ratings firms, the company's growth and profit margins could suffer.

The company's credit-rating business benefited from a boom in debt issuance between 2003 and 2007 as several macroeconomic factors worked in its favor. The same macroeconomic factors are unlikely to be as favorable over the next several years. Read more

Strategy

Moody's has increasingly focused on expanding nonrating businesses such as risk management and economic research, and in broadening its presence internationally. While much of the expansion has been Read more

Management

Ray McDaniel became CEO and chairman in 2005 and had served as president of the rating business since 2001. We'd prefer to see the roles of CEO and chairman split. We'd also like to see changes in the company's staggered elections for the board of directors. Read more

Profile

Moody's publishes research and ratings on fixed-income securities, issuers of securities, and other credit obligations. It has offices in foreign countries and is expanding Read more

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