Moody’s Corporation June 2014 Quarterly Valuation $MCO

200px-Moody’s_logo.svgBenjamin 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 5 Undervalued Companies with a High Beta.  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 specific look at how Moody’s Corporation (NYSE: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 institutional customers. The Company operates in two segments: Moody’s Investors Service (MIS) and Moody’s Analytics (MA). The MIS segment consists of all credit rating activity. All of Moody’s other non-rating commercial activities are included within the MA segment. As of December 31, 2012, MIS had ratings relationships with approximately 10,000 corporate issuers and approximately 22,000 public finance issuers. During the year ended December 31, 2012, the Company had rated and monitored ratings on approximately 82,000 structured finance obligations (representing approximately 13,000 transactions).

MCO Chart

MCO data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
  3. Earnings Stability – positive earnings per share for at least 10 straight years - PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – PASS
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend - PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $85.54
MG Value $91.27
MG Opinion Fairly Valued
Value Based on 3% Growth $48.51
Value Based on 0% Growth $28.44
Market Implied Growth Rate 8.53%
Net Current Asset Value (NCAV) -$4.78
PEmg 25.57
Current Ratio 2.87
PB Ratio 47.32

Balance Sheet – 3/31/2014

Current Assets $2,945,800,000
Current Liabilities $1,027,300,000
Total Debt $2,097,500,000
Total Assets $4,353,400,000
Intangible Assets $869,400,000
Total Liabilities $3,967,100,000
Outstanding Shares 213,680,000

Earnings Per Share

2014 (estimate) $3.90
2013 $3.60
2012 $3.05
2011 $2.49
2010 $2.15
2009 $1.69
2008 $1.87
2007 $2.58
2006 $2.58
2005 $1.84
2004 $1.40

Earnings Per Share – ModernGraham

2014 (estimate) $3.35
2013 $2.91
2012 $2.46
2011 $2.16
2010 $2.06
2009 $2.04

Dividend History
MCO Dividend Chart

MCO Dividend data by YCharts


Moody’s does not qualify for the Defensive Investor but is suitable for the Enterprising Investor.  The Defensive Investor has concerns with the high PEmg and PB ratios, while the company passes all of the requirements of Enterprising Investors.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods, should feel comfortable conducting further research into the company including a review of ModernGraham’s valuation of Equifax (EFX).  From a valuation perspective, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $2.06 in 2010 to an estimated $3.35 for 2014.  This demonstrated level of growth supports the market’s implied estimate of 8.53% earnings growth and leads the ModernGraham valuation model to return an estimate of intrinsic value within a margin of safety relative to 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.

Disclaimer:  The author did not hold a position in Moody’s Corporation (MCO) or any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.

Logo taken from wikipedia; this article is not affiliated with the company in any manner.

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