Depressing Times For Moody’s Corporation

Investors willing to look past Moody’s (MCO-NYSE) headline risks might want to start rolling up their sleeves. The stock has been pummeled, and bears have minted 30+ points in the stock after getting short the stock as the CDO crisis began to grip Wall Street. Whether the quagmire was abusive or just stupid is debatable, but there is a big mess to clean up.

Richard Blumenthal, the Attorney General of Connecticut, is pressing his case against the 3 major ratings agencies:

Connecticut’s attorney general said Friday that he has subpoenaed the nation’s three largest debt-rating agencies as part of an investigation into possible anticompetitive practices.

“Assuring debt ratings are honest and untainted is vital to investors, companies and government,” Blumenthal said.

Moody’s earnings release early this week was not enough to assure bulls, who let the stock slide to fresh lows this morning before buyers emerged. Analysts have been busy cutting earnings estimates, and with the structured finance business unlikely to recover EPS growth should be hard to come by.

Domestic ratings revenues were essentially flat year over year in the recently completed third quarter, with a 43% decline seen in high yield debt segment. International growth remains robust for now, bolstered in part by the decline in the U.S. dollar. The company is tweaking its capital structure, and using the increase flexibility to buy back stock.

Moody’s management is trying to cope with the regulatory onslaught, and made this statement earlier in the week on the third quarter call:

Moody’s has been proactively meeting with authorities to discuss matters such as our role in the structured finance markets and the meaning of our ratings; our ratings in monitoring of subprime residential mortgage-backed securities for RMBS; steps that Moody’s is taking to enhance our ratings processes and reinforce the independence of the rating agency, as well as steps that the market and the regulators might consider in response to the credit market disruptions. We believe that we are making good progress in communicating our messages and understanding the issues and concerns that various authorities may have.

A number of reviews are in process focusing on the role and function of rating agencies. These include the annual review rating agencies being conducted by CESR, the Committee of European Securities Regulators, to asses the effectiveness of the current industry self-regulatory approach in Europe, the review of rating agencies’ role in structured finance by IOSCO, the International Organization of Securities Commissions that was announced earlier this year, and reviewed by the U.S. SEC of NRSROs active in subprime RMBS ratings. We are participating constructively in these and other reviews, but it is premature to forecast our ultimate outcomes. Seeking Alpha

The bright point of the earnings guidance might have been the end of a duplicative lease that arose from moving into Moody’s new headquarters.

William Blair recently added the stock to its Current Better Values list, a move we thought might be a bit premature. Analysts should be able to draw a sharper bead on the stock’s prospects and valuation in the months ahead.

We are waiting for the stock to put in some sort of technical bottom, and let management deal with the legal issues it faces. Jim Chanos and the shorts might be covering some stock in here, but the all clear horn might not be sounded for some time yet.

Assuming Moodys can repair its damaged reputation.

Connecticut Subpoenas Rating Agencies
AP

Seeking Alpha
Conference Call Transcript
-----------------------------------------------------------------------------------------------------------------------
The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No positions in stocks mentioned.

Comments:

<< Back to main