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Moody's Corp. (MCO)



Business Description

Moody’s, along with S&P Ratings, is a leading provider of credit ratings on fixed income securities. Moody’s ratings segment, known as Moody’s Investors Service or MIS, includes corporates, structured finance, financial institutions, and public finance ratings. MIS represents a majority of the firm’s revenue and profits. Moody’s other segment is Moody’s Analytics and consists of Research, Data, and Analytics or RD&A and Enterprise Risk Solutions or ERS. RD&A’s products include credit research, quantitative credit scores, economic research, business intelligence, know your customer (KYC) tools, commercial real estate data and analytical tools, and training services. ERS includes risk management software solutions to financial institutions.


Analyst Notes


There are only a few businesses in the world that pass the ‘100 year’ test. Moody’s is one of them.

Founded in 1909 by John Moody, Moody’s became the world’s first credit rating agency. Standard’s, Poor’s (which later merged and became S&P) and Fitch followed.

By 1920, Moody’s was rating various types of fixed-income securities. A credit score is really important and serves a crucial function in helping creditors decide whom to lend to. It’s important to people, but especially to corporations and countries.

And if credit scores are so important, then the businesses behind calculating them are also considered vital. For a credit score to be taken seriously, it must be issued from a trusted, reliable source that has years of data to crunch and a team of experts to analyze and compute an appropriate credit score. This is what the Moody’s brand stands for.


Moats Include

  1. Regulatory Protection

  2. Time in Market

  3. NetworkEffects

  4. Switching Costs

Some Concerns

  1. Durable business, but cyclical.

  2. Tied to macro metrics like global interest rates and economic growth.

  3. MA is an acquisitive segment that is difficult to forecast. Management has invested large sums which has put significant downward pressure on ROC levels. Will these investments play out favorably?

  4. Business model has inherent conflict of interest, bringing into question the objectivity of ratings. How are credit rating agencies expected to provide unbiased, fair ratings to the companies that are its own customers?


For full report, see link below


Moody's Investment Memo
.pdf
Download PDF • 530KB

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