Author Topic: MCO - Moody's  (Read 41443 times)

walkie518

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Re: MCO - Moody's
« Reply #90 on: March 27, 2019, 09:16:29 AM »
apologize if covered elsewhere, but was doing some work on this one more for academic purposes than to invest in the company

although possibly somewhat stagnant in terms of its internal development, Moody's appears capable of maintaining high returns on capital for the foreseeable with almost no long-term risk on capital

and sure, I'd love to buy the stock for $100, but current pricing and models don't always sync up...anyone have any insight into what the market is adding into current pricing? are there future events priced into the stock or possibly some margin expansion?


QuickFS

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Re: MCO - Moody's
« Reply #91 on: March 27, 2019, 10:02:06 AM »
anyone have any insight into what the market is adding into current pricing? are there future events priced into the stock or possibly some margin expansion?

The Shiller P/E is ~30x, while the S&P 500 P/E is 21x (trailing 4 quarters). Moody's trades at 27x earnings and roughly the same for "normal" free cash flow. I think it's just an expensive market with low interest rates.
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Schwab711

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Re: MCO - Moody's
« Reply #92 on: March 27, 2019, 10:05:19 AM »
What assumptions are you coming to? I can at least share what I'm thinking relative to them that makes me continue to hold a position. My 1-floor elevator pitch is there is still a long runway of operating leverage due to price increases.

At least part of the recent thesis shift is due to some thought that corporate bond pricing will head towards "up to 12 bps" like structured financing. Another part of the thesis is that recurring rating revenue is also increasing. This is partially going to be offset by a continued shift towards 1-2 ratings per issuance from 2+.

FCF multiples are a better gauge for both companies due to amortization more aggressive than the 'true lifespan' of assets acquired.

https://twitter.com/MoatsLikeKodak/status/1080570944865873927

Liberty pointed to an article from a few years ago that talks about the gap between MCO and SPGI pricing as 0.05bps. I heard that is still accurate. For structured/complex, MCO's pricing advantage is slightly higher.
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/mco-moody's/msg356632/#msg356632

The trend on corp pricing should help SPGI more than MCO. I'm starting to become more positive on SPGI than MCO. If I wasn't so committed to MCO, I'd have already switched my interest to at least 50/50. I've been considering how much to move in to SPGI for a while. I have a very large allocation to MCO/SPGI/FICO based on price taking over the next decade. I think evidence supports above-inflation pricing growth for a very long period for all of them, though at different magnitudes.

cmlber

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Re: MCO - Moody's
« Reply #93 on: March 28, 2019, 07:46:09 AM »
Liberty pointed to an article from a few years ago that talks about the gap between MCO and SPGI pricing as 0.05bps. I heard that is still accurate. For structured/complex, MCO's pricing advantage is slightly higher.
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/mco-moody's/msg356632/#msg356632

The trend on corp pricing should help SPGI more than MCO. I'm starting to become more positive on SPGI than MCO. If I wasn't so committed to MCO, I'd have already switched my interest to at least 50/50. I've been considering how much to move in to SPGI for a while. I have a very large allocation to MCO/SPGI/FICO based on price taking over the next decade. I think evidence supports above-inflation pricing growth for a very long period for all of them, though at different magnitudes.

Schwab, why are you becoming more positive on SPGI?  Why should the trend on corp pricing help SPGI more than MCO? 

Schwab711

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Re: MCO - Moody's
« Reply #94 on: March 28, 2019, 09:40:57 AM »
https://www.sec.gov/2018-annual-report-on-nrsros.pdf
p.12 has the market share table.
p.21 shows some stats on ABS market share.

Traditionally, SPGI had a large lead in traditional corporate ratings and MCO had a lead in specialized/complex ratings (ABS). SPGI is maintaining their corporate rating lead and corporate ratings are becoming more profitable. In contrast, MCO is starting to see its hold on specialized/complex ratings decline. Further, the corporate rating trend towards 1-2 ratings from 2+ seems to benefit SPGI/Fitich at the expense of MCO. Fitch is sacrificing margins (through staffing and pricing) to gain market share over the last few years. This has traditionally been MCO's competitive advantage (staffing/expertise). Long setup to: I still really like MCO, but SPGI is likely to benefit from competitive shifts in the market.

When comparing the secondary businesses, I still don't know if index licensing will have a role in the long-run but it's hard to see it fading away on the timeline I originally thought a few years ago. ETF fees are near zero and we still have increasing licensing revenue. At one point, I didn't want to pay up for S&P/DOW when I could've bought MSCI on my own if I really wanted to be in that business. I'm not sure Capital IQ will face meaningful competition as quickly as I first thought, though I think the trend is going towards ease of access to SEC filing data.

In general, I'm slightly less excited about MCO's rating business, slightly more excited about SPGI's rating business, and slightly less negative on SPGI's other businesses, as compared to my views from a few years ago.
« Last Edit: March 28, 2019, 09:43:12 AM by Schwab711 »

cmlber

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Re: MCO - Moody's
« Reply #95 on: March 28, 2019, 01:28:23 PM »
Traditionally, SPGI had a large lead in traditional corporate ratings and MCO had a lead in specialized/complex ratings (ABS). SPGI is maintaining their corporate rating lead and corporate ratings are becoming more profitable. In contrast, MCO is starting to see its hold on specialized/complex ratings decline. Further, the corporate rating trend towards 1-2 ratings from 2+ seems to benefit SPGI/Fitich at the expense of MCO. Fitch is sacrificing margins (through staffing and pricing) to gain market share over the last few years. This has traditionally been MCO's competitive advantage (staffing/expertise). Long setup to: I still really like MCO, but SPGI is likely to benefit from competitive shifts in the market.

If you look at SPGI corporate ratings revenue in 2018, 2017, 2016 it's been 117%, 120%, and 118%, respectively, of Moody's corporate ratings revenue.  So for the extra 18-20% exposure to corporates, is it really worth diluting your ownership in the ratings business?  Also, the #s don't show that MCO is losing share at the expense of SPGI.  Do you have any sources on the trend towards 1-2 ratings vs 2+?  Have you seen the split-rating study that found for bonds with split ratings when Moody's has the higher rating the yield is 8bps lower than when SPGI has the higher rating?  (i.e., the data shows markets trust a Moody's rating more). 

Schwab711

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Re: MCO - Moody's
« Reply #96 on: April 01, 2019, 07:34:46 AM »
Traditionally, SPGI had a large lead in traditional corporate ratings and MCO had a lead in specialized/complex ratings (ABS). SPGI is maintaining their corporate rating lead and corporate ratings are becoming more profitable. In contrast, MCO is starting to see its hold on specialized/complex ratings decline. Further, the corporate rating trend towards 1-2 ratings from 2+ seems to benefit SPGI/Fitich at the expense of MCO. Fitch is sacrificing margins (through staffing and pricing) to gain market share over the last few years. This has traditionally been MCO's competitive advantage (staffing/expertise). Long setup to: I still really like MCO, but SPGI is likely to benefit from competitive shifts in the market.

If you look at SPGI corporate ratings revenue in 2018, 2017, 2016 it's been 117%, 120%, and 118%, respectively, of Moody's corporate ratings revenue.  So for the extra 18-20% exposure to corporates, is it really worth diluting your ownership in the ratings business?  Also, the #s don't show that MCO is losing share at the expense of SPGI.  Do you have any sources on the trend towards 1-2 ratings vs 2+?  Have you seen the split-rating study that found for bonds with split ratings when Moody's has the higher rating the yield is 8bps lower than when SPGI has the higher rating?  (i.e., the data shows markets trust a Moody's rating more).

On the 1-2 trend, see the twitter link I posted before. There's an article linked that's relevant. To your point, I don't know that MCO is losing share in that way. I'm guessing where the trend is heading. It's interesting that the ratings market is changing for the first time in a while. Something to watch. I don't disagree that I generally don't want to dilute the ratings business. On the other hand, buying back shares at 4%-5% yield is not necessarily the best plan. I'd like to see MCO buy Sentieo and maybe some other financial services businesses.

I've heard of the 8bp stat before :)
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/mco-moody's/msg287307/#msg287307

cmlber

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Re: MCO - Moody's
« Reply #97 on: April 02, 2019, 07:23:29 AM »
Traditionally, SPGI had a large lead in traditional corporate ratings and MCO had a lead in specialized/complex ratings (ABS). SPGI is maintaining their corporate rating lead and corporate ratings are becoming more profitable. In contrast, MCO is starting to see its hold on specialized/complex ratings decline. Further, the corporate rating trend towards 1-2 ratings from 2+ seems to benefit SPGI/Fitich at the expense of MCO. Fitch is sacrificing margins (through staffing and pricing) to gain market share over the last few years. This has traditionally been MCO's competitive advantage (staffing/expertise). Long setup to: I still really like MCO, but SPGI is likely to benefit from competitive shifts in the market.

If you look at SPGI corporate ratings revenue in 2018, 2017, 2016 it's been 117%, 120%, and 118%, respectively, of Moody's corporate ratings revenue.  So for the extra 18-20% exposure to corporates, is it really worth diluting your ownership in the ratings business?  Also, the #s don't show that MCO is losing share at the expense of SPGI.  Do you have any sources on the trend towards 1-2 ratings vs 2+?  Have you seen the split-rating study that found for bonds with split ratings when Moody's has the higher rating the yield is 8bps lower than when SPGI has the higher rating?  (i.e., the data shows markets trust a Moody's rating more).

On the 1-2 trend, see the twitter link I posted before. There's an article linked that's relevant. To your point, I don't know that MCO is losing share in that way. I'm guessing where the trend is heading. It's interesting that the ratings market is changing for the first time in a while. Something to watch. I don't disagree that I generally don't want to dilute the ratings business. On the other hand, buying back shares at 4%-5% yield is not necessarily the best plan. I'd like to see MCO buy Sentieo and maybe some other financial services businesses.

I've heard of the 8bp stat before :)
http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/mco-moody's/msg287307/#msg287307

Haha, I guess you are familiar with the 8bps stat :) that to me would be a reason to go with Moody's over S&P if you were only going to have one rating...

I disagree on buybacks.  If you think it's priced attractively to warrant investing, why isn't it a good use for company cash?  Sentieo seems like a commodity to me.  You can get the transcript search features with BamSEC for $300/yr and otherwise everything else they offer is pretty basic.

FiveSigma

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Re: MCO - Moody's
« Reply #98 on: April 22, 2019, 08:37:39 AM »
Here is the article discussing a trend towards a single rating in the Muni space that I think someone mentioned earlier:

https://www.governing.com/topics/finance/gov-finance-roundup-government-one-credit-rating-trend.html

Quote
So what’s changed?

For starters, most governments don’t use bond insurance -- which used to account for more than half of bond sales -- anymore. Bond insurance allows a government to pay a AAA-rated insurer to guarantee the bond. This, in turn, essentially gave the sale a AAA rating. The bond insurance package also made it easier to obtain multiple ratings because governments didn't have to solicit ratings on their own.

With the downfall of most bond insurance companies following the financial crisis, governments now have to do the legwork themselves. And the more ratings they solicit, the higher the cost. Getting just one rating can run a government between $7,500 and $495,000 per municipal bond offering based on factors like the sector, amount financed, structure and complexity, according to research by Marc Joffe, a senior policy analyst for the Reason Foundation and Governing contributor.

Meanwhile, the process itself has become more transparent. Governments provide their financials online now and are increasingly hosting investor conferences to build relationships. New rules have also made it easier to find and compare a government’s hidden costs, like foregone tax revenue, and liabilities, such as pension debt.

“People have gotten much more comfortable buying asset-backed securities in the last few years,” says Joffe. “With the financial crisis well in the rearview mirror, I don’t think people are really that worried anymore.”