Buy Moody's
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  • Might even be helped by credit crisis

Buy Moody's Buy Moody's Presentation Transcript

  • Buy Recommendation Presentation by Dylan Haggart & Dave Gregory 03/05/2008
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • Presentation by Dylan Haggart & Dave Gregory 03/05/2008 P/E Multiple Analysis
  • 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
  • Presentation by Dylan Haggart & Dave Gregory 03/05/2008 Intrinsic Valuation Analysis
  • Sensitivity Analysis Presentation by Dylan Haggart & Dave Gregory 03/05/2008
  • 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