Buy Recommendation Presentation by Dylan Haggart & Dave Gregory 03/05/2008
Business Model Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>Investor Services (rating agency) </li></ul...
Business Model Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>Core business line is credit rating </li></...
Business Model Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>International </li></ul><ul><ul><li>45% of ...
Internal Analysis Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>Moody’s adopted a new structure Jan 1 st...
Financial Performance Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>Analysis of last five years </li></u...
Economic Moat Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>Duopoly with S&P </li></ul><ul><ul><li>Susta...
Related Industries Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>Investment Banking </li></ul><ul><ul><l...
Recent Events Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>Decline is share price tied to reduced earni...
Structured Products Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>Growth in structured products has cont...
Investment Thesis Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>Variable cost business </li></ul><ul><ul...
Investment Thesis Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>Will continue to effectively cut costs  ...
Investment Risks Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>SEC regulation </li></ul><ul><li>Reputati...
Presentation by Dylan Haggart & Dave Gregory 03/05/2008 P/E Multiple Analysis
Presentation by Dylan Haggart & Dave Gregory 03/05/2008 <ul><li>Historical price to earnings ratios </li></ul><ul><li>With...
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 <ul><li>An investment in Moody’s is a bet that the fixe...
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Buy Moody's

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

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