Now that it appears Moody’s (NYSE:MCO) may be looking out for investors with its downgrade of Portuguese debt, the company’s management may be hoping we will forget about how it contributed to the financial crisis that burst in 2008. After a 94% rise in Moody’s stock in the last year, is the company’s seemingly newfound attitude a reason to buy its stock?
Moody’s was not just late to the party when it came to the financial crisis — it was an active participant. As I posted in 2007, Moody’s competed to give a triple-A rating portfolios of mortgages that contained subprime mortgages. Without those ratings, investors would not have purchased those gold-wrapped boxes of financial toxic waste.
But that’s all in the past — and now the reasons to buy the stock outweigh the ones to avoid it. Here are three reasons to favor the stock:
• Strong first-quarter performance. Moody’s posted 67 cents a share in first quarter 2011 earnings, above the consensus expectation of analysts surveyed by Thomson Reuters I/B/E/S. Moody’s also raised the midpoint of its full-year earnings outlook and raised its dividend 22% to 14 cents per share.
• Long-term financial strength. Moody’s enjoys a 26.6% net profit margin, it has no debt, and its cash has grown at an 8.6% annual rate between 2006 ($484 million) and 2010 ($672 million).
• Out-earning its capital cost. Moody’s earns more operating profit than its cost of capital and it has solid EVA Momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In 2010, Moody’s EVA momentum was 3%, based on 2009 revenue of $1.8 billion, and EVA that improved from $356 million in 2009 to $394 million in 2010, using a 10% weighted average cost of capital.
One negative is Moody’s high valuation. Moody’s price-to-earnings-to-growth (PEG) ratio of 1.67 makes it fairly expensive (a PEG of 1.0 is considered fairly priced). Moody’s P/E is 16.5 and its earnings are expected to grow 9.9% to $2.58 a share in 2012.
After a big runup over the last year, Moody’s is looking like a long-term holding that you might consider buying after a market break. I would not be surprised to see one this month due to debt-ceiling negotiations.
Peter Cohan has no financial interest in the securities mentioned.
