MCO - Embedded Expectations Analysis - 2020 08 06
Moody's Corporation (MCO:USA) currently trades at a historical high relative to UAFRS-based (Uniform) earnings, with a 30.1x Uniform P/E. At these levels, the market has bullish expectations for the firm, but management may be concerned about meeting free cash flow targets, Moody's Analytics usage sustainability, and the health of credit marketsSpecifically, management may lack confidence in their ability to reach their net interest expense and free cash flow targets, optimize the balance sheet by investing excess cash for growth, and successfully have sales meetings online. In addition, they may have concerns about Moody's Analytics' sales mix and the sustainability of its high product usage, and they may lack confidence in their less favorable rated issuance mix. Moreover, they may be exaggerating the number of fallen angel bonds that could be issued and the strength of speculative-grade credit, and they may be downplaying concerns about high-yield credit defaults. Furthermore, they may be concerned about the effectiveness of ECB measures to improve liquidity in the European investment-grade market, the macro shocks to the economy, and the usefulness of their macro scenarios to their banking customers
Moody's is a provider of credit ratings and assessment services; credit, capital markets and economic research, data and analytical tools; software solutions that support financial risk management activities; quantitatively derived credit scores; learning solutions and certification services; and company information and business intelligence products. The company's segments are: Moody's Investors Service, which publishes credit ratings on a range of debt obligations and the entities that issue such obligations in markets worldwide; and Moody's Analytics, which provides financial intelligence and analytical tools to assist businesses in making decisions.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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