While
it's true that headlines can quickly and sometimes violently affect
stock
prices, they can also create exceptional opportunities; Moody's (MCO)
might just be
the perfect example of a positive opportunity.
Back
in February the Department of Justice filed a civil suit against
Standard &
Poor's (MHP)
alleging that S&Pengaged in a scheme to defraud investors in
structured financial products known as Residential Mortgage-Backed
Securities
(RMBS) and Collateralized Debt Obligations (CDOs).
The
news sent shockwaves through the sector and gave MCO a 30% haircut from
its
high. To be clear, Moody's is a competitor
of S&P and one of the three major CRAs in the world.
There may have been good reason to react that
way, but it was no doubt overdone.
Shares
have recovered about 80% of that selloff, but there might be even more
upside
from these levels.
A
Necessary Niche
Moody's is an essential component of the
global capital markets. Their credit
ratings, research, tools and analysis are a trusted source for millions
and help
determine risk allocations for everyone from average investors to
sovereign
nations.
The average credit
rating of a company (or
countries) debt directly affects what interest rate they have to pay to
borrow
money and help those lenders understand just how much risk they are
taking
on. Ratings are required by many investors
to even entertain any cash outlay.
Moody's one of three
major agencies that
offer this service and they have done so for over a century.
This is a company that reported revenue of
$2.7 billion in 2012 and employs approximately 6,800 people worldwide
in 28
countries; they're not small potatoes.
The world is not only
becoming more
integrated, but a great deal of our lives and the stuff we buy (houses,
etc)
are becoming securitized and need the services of Moody's to give the
public a
sense of value and risk. Securitization
of rental properties are an up and coming industry that will require
Moody's services. Blackstone and Deutsche Bank are
introducing
the first REO to rental securities and someone has to "rate" their risk.
The reality is that
business is forced in a
sense to use Moody's services and the greatest irony here is that when
S&P
downgraded U.S. debt (which is what they should have done) they got
slapped
with a lawsuit (most likely unrelated, but still odd in my opinion).
The bottom line is
that Moody's in a
completely different entity when compared to S&P or Fitch.
Moody's makes their decisions based on their own
models and assumptions. The models are
obviously not fool-proof, but unless Moody's participated in a grand
scheme to
defraud millions of investors (which I don't think they did) or was in
cahoots
with S&P, I don't think they are going anywhere; in fact, I
think they will
continue to flourish!
Of course there is
the reality that corporations
and countries pay companies like S&P and Moody's to get rated
in the first
place. Some view this as a conflict of interest,
but just as a person might pay Sotheby's to appraise their fine art and
then
have them sell it, it is Sotheby's job to be as honest as possible to
uphold their
reputation and keep customers on both sides coming back.
If the marketplace
believed that Sotheby's
was artificially inflating prices, then they either don't pay the price
or shun
Sotheby's altogether.
In the subjective,
intangible world of high
finance, there are NO absolutes.
Strong
Earnings and Revenue Growth
Moody's reported upbeat fourth
quarter results in early February, showing strength in new domestic
debt
issuance and improving clarity over regulatory climate in Europe.
They earned 75 cents
per share, a 62.8% jump from
the year-ago quarter and beat the Zacks Consensus Estimate of 70 cents
by 7.14%.
The report marked the fourth consecutive quarter of positive earnings
surprises
with an average beat of 10.4%.
The
better-than-expected earnings were
primarily driven by 33.0% surge in revenues and 53.7% jump in operating
income.
Based on the strong
results, Moody's provided
optimistic guidance for fiscal 2013. Moody's expects 2013 revenues to
grow in
the high single-digit percent range. Operating margin is projected to
be
between 46% and 47%. Earnings for 2013 are expected to be in the range
of $3.45
to $3.55 per share.
The Zacks Consensus
Estimate for fiscal 2013
increased 9.1% to $3.49 per share as most of the estimates were revised
higher
over the last 60 days. The current estimate is within the guidance
range
provided by Moody's. For fiscal 2014, the Zacks Consensus Estimate has
again increased
to $3.81 per share.
The long-term
expected earnings growth rate
for Moody's is 14.0%, which easily justifies their forward multiple of
15 in my
opinion.
The
Charts
Moody's has been in a bullish ascending
channel sings the correction in early February.
Shares never closed below the 200 day moving average and the 50 day
moving average still remains firmly above the 200, both positive signs
for the
stock.
The current 50 day
simple moving average of
$50.54 coincides with past support in the current short term trend.
Looking below that, traders can also use the
50 day WVAP of $48.53 as strong support.
The VWAP is so much lower than the regular 50 day average due to all
the
volume that changed hands during the S&P debacle.
To the upside, look
for a target of $55.14,
which is just under the 52 week high of $55.58.
That might be an area to take small profits. If shares break
through that level with
better than average volume, we could see a breakout run of 5% or so.
Moving
Forward
Earnings are due out April 25th
and with its Zacks Rank of 1 and positive ESP of $4.65%, there is a
strong likelihood
that they will beat the Zacks Consensus.
The company has already offered positive guidance for the year, we need
to see that stay intact and for revenues to be growing as well.
Moody's is certainly
a stock I wouldn't mind
owning here.
Jared
A Levy is one of the most highly sought after traders in the world and
a former
member of three major stock exchanges. That is why you will frequently
see him
appear on Fox Business, CNBC and Bloomberg providing his timely
insights to
other investors. He has written and published two tomes, "Your
Options Handbook" and "The
Bloomberg Visual Guide
to Options".
You can discover more of his insights and recommendations through his
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portfolio recommendation services:
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MOODYS CORP (MCO): Free Stock Analysis Report
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