Financial Services Stocks

Moody’s Corporation Analysis – September 2015 Update $MCO

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Most Undervalued Companies for the Defensive Investor – August 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Moody’s Corporation (MCO) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Moody’s Corporation (Moody’s) is a provider of credit ratings; credit, capital markets and economic related research, data and analytical tools; software solutions and related risk management services; quantitative credit risk measures, financial services training and certification services, and outsourced research and analytical services to financial institution customers. The Company operates in two segments: Moody’s Investors Service (MIS) and Moody’s Analytics (MA). The Company’s MIS segment publishes credit ratings on a range of debt obligations and the entities that issue such obligations in markets across the world, including various corporate and Governmental obligations, structured finance securities and commercial paper programs. The Company’s MA segment develops a range of products and services that support financial analysis and risk management activities of institutional participants in financial markets.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of MCO – September 2015

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $20,190,124,543 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.72 Pass
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 81.51% Pass
6. Moderate PEmg Ratio PEmg < 20 25.24 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 -62.91 Fail
Score
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.72 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 1.60 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Pass

Stage 2: Determination of Intrinsic Value

MCO value Chart September 2015

EPSmg $4.04
MG Growth Estimate 13.01%
MG Value $139.43
Opinion Undervalued
MG Value based on 3% Growth $58.56
MG Value based on 0% Growth $34.33
Market Implied Growth Rate 8.37%
Current Price $101.93
% of Intrinsic Value 73.11%

Moody’s Corporation qualifies for the Enterprising Investor but not the more conservative Defensive Investor.  The Defensive Investor is concerned with the high PEmg and PB ratios.  The Enterprising Investor is only concerned with the level of debt relative to the net current assets.  As a result, all Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with further research into the company.

As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $2.16 in 2011 to an estimated $4.044 for 2015.  This level of demonstrated earnings growth outpaces the market’s implied estimate of 8.37% annual earnings growth over the next 7-10 years.  As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value above the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Moody’s Corporation (MCO)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Stage 3: Information for Further Research

MCO Charts September 2015

Net Current Asset Value (NCAV) -$11.09
Graham Number #NUM!
PEmg 25.24
Current Ratio 2.72
PB Ratio -62.91
Dividend Yield 1.22%
Number of Consecutive Years of Dividend Growth 6

 

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Most Recent Balance Sheet Figures

Total Current Assets $3,064,000,000
Total Current Liabilities $1,124,800,000
Long-Term Debt $3,106,100,000
Total Assets $4,999,500,000
Intangible Assets $1,329,400,000
Total Liabilities $5,330,700,000
Shares Outstanding (Diluted Average) 204,400,000

Earnings Per Share History

Next Fiscal Year Estimate $4.55
Dec14 $4.61
Dec13 $3.60
Dec12 $3.05
Dec11 $2.49
Dec10 $2.15
Dec09 $1.69
Dec08 $1.87
Dec07 $2.58
Dec06 $2.58
Dec05 $1.84
Dec04 $1.40
Dec03 $1.20
Dec02 $0.92
Dec01 $0.66
Dec00 $0.49
Dec99 $0.78
Dec98 $0.82

Earnings Per Share – ModernGraham History

Next Fiscal Year Estimate $4.04
Dec14 $3.58
Dec13 $2.91
Dec12 $2.46
Dec11 $2.16
Dec10 $2.06
Dec09 $2.04
Dec08 $2.17
Dec07 $2.18
Dec06 $1.85
Dec05 $1.39
Dec04 $1.09
Dec03 $0.89
Dec02 $0.74
Dec01 $0.61
Dec00 $0.53
Dec99 $0.48

Recommended Reading:

Other ModernGraham posts about the company

The Best Stocks of the Financial Services Industry – September 2015
The 10 Best Stocks For Value Investors This Week – 6/20/15
Moody’s Corporation Analysis – June 2015 Update $MCO
18 Companies in the Spotlight This Week – 3/15/15
Moody’s Corporation Quarterly Valuation – March 2015 $MCO

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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