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Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
Buy Moody's
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Buy Moody's

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  • Might even be helped by credit crisis
  • Transcript

    • 1. Buy Recommendation Presentation by Dylan Haggart & Dave Gregory 03/05/2008
    • 2. Business Model Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • Investor Services (rating agency)
        • Perform comprehensive analysis of debt products
        • Inexpensive to issuers (~50bps)
        • Continuing expansion into rating project finance and bank loans
      • Analytics
        • Developing products to aid effective fixed income valuation
        • Not related to credit turmoil
        • 8 year CAGR of 22% (2000-2007)
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion
    • 3. Business Model Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • Core business line is credit rating
        • Much more focused than competitor S&P
        • More downside in bad times, more upside in good times
      • A managerial tradition of little to no long term debt
      • Capital Expenditures
        • Growth is not funded by continued capex investments
        • Constant operating margins
        • All products have similar margins
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion
    • 4. Business Model Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • International
        • 45% of 2007 revenues are international
      • Emerging markets
        • Revenues are growing at 30% CAGR
      • Revenues generated by the rating agency are:
        • Recurring – 42% of revenues
          • Monitoring outstanding issuances
          • Frequent users (CP, MTN)
        • Transaction – 58% of revenues
          • Responsible for most of the decline in earnings
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion
    • 5. Internal Analysis Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • Moody’s adopted a new structure Jan 1 st 2008
        • Moody’s Investor Services
          • 2007 Revenue of $1,780M
          • 79% of MCO revenues
        • Moody’s Analytics
          • 2007 Revenue of $479M
          • 21% of MCO revenues
      • Effective cost control to combat shrinking margins
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion
    • 6. Financial Performance Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • Analysis of last five years
        • Revenue growth – 16% CAGR
        • Operating Margins – Steady between 54% - 52%
        • Net Income – 18% CAGR
      • A main component in the steady growth has been the credit boom
        • The prevalence of structured finance over the past 3 years has been a major factor in Moody’s increasing margins
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion
    • 7. Economic Moat Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • Duopoly with S&P
        • Sustainable – more than one rating is desired
      • Perceived by the market as being the “top” bond rating agency
      • Reputation is everything
      • Act as gatekeepers
        • Credit products need ratings to attract investors
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion
    • 8. Related Industries Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • Investment Banking
        • Steep decline in CDO and high yield bond origination
        • In the business of creating new structured products
      • Investment funds
        • May have strategies designed around ratings
        • Bond/Security ratings have become institutionalized
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion
    • 9. Recent Events Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • Decline is share price tied to reduced earnings and forward credit fears
      • The credit markets have dried up
        • A majority of Moody’s revenues are tied to the creation of new debt securities
        • Fears that credit crunch will drag on
      • Short term impact only?
        • Investment bankers create debt products
        • Credit crunch will not last forever
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion
    • 10. Structured Products Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • Growth in structured products has contributed to revenue growth
      • Collateralized Debt Obligations ect.
        • Complex structures make them harder to rate
        • Fees for rating structured products are higher
      • Future outlook
        • Again, investment banks are in the business of creating securities
        • The majority of these securities need to be rated
        • Many structured products continue to be created
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion
    • 11. Investment Thesis Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • Variable cost business
        • Low overhead
        • Labour force is non-unionized
        • Will cut costs when necessary
      • Sustainable Duopoly
      • Almost zero capital expenditures
      • Credit markets will improve
        • Only short term earnings will be effected (1-3y)
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion
    • 12. Investment Thesis Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • Will continue to effectively cut costs
        • Variable cost model allows for quick turnaround
      • Analytics business will continue to grow
        • Not tied to global credit cycle
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion
    • 13. Investment Risks Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • SEC regulation
      • Reputational Damage
        • They were wrong on CDO’s and didn't recognize the risk
      • Increased competition
      • The market has peaked and will now decline
      • Their “issuer-pay” model might be banned
      • Perceived key investor risk
        • If Buffet sells his stake
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion
    • 14. Presentation by Dylan Haggart & Dave Gregory 03/05/2008 P/E Multiple Analysis
    • 15. Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • Historical price to earnings ratios
      • Without the credit crunch, where it would be trading
      P/E Multiple Analysis Five Year Average P/E 25.33x Pre-Credit Crunch P/E 27.07x Seven Year Average P/E 26.05x Forward EPS $2.119 for 2008 Five Year Average P/E $53.67 Pre-Credit Crunch P/E $57.36 Seven Year Average P/E $55.21
    • 16. Presentation by Dylan Haggart & Dave Gregory 03/05/2008 Intrinsic Valuation Analysis
    • 17. Sensitivity Analysis Presentation by Dylan Haggart & Dave Gregory 03/05/2008
    • 18. Conclusion Presentation by Dylan Haggart & Dave Gregory 03/05/2008
      • An investment in Moody’s is a bet that the fixed income market will continue to grow
      • A P/E of 12 isn't justified
        • Earnings will drop, but share price shouldn't drop faster
      • Valuation ranging from 13.29B to 14.21B from multiples
      • Discounted cash flow valuation places MCO between 13.57B and 15.17B
      • Currently valued at 9.31B
      Business Model Internal Analysis Financial Analysis Economic Moat Investment Thesis Industry Analysis Valuation Analysis Investment Conclusion

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