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Moody’s Corporation – The Pullback I Have Awaited Has Arrived

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In my March 3rd analysis written exclusively for Financial Freedom is a Journey subscribers I indicated I viewed Moody's (NYSE: MCO) as being overvalued.

MCO's share price has taken a beating in recent months and less than impressive Q3 results released October 26th has knocked another ~13.44% from its share price.

I like it when high quality companies fall out of favor with the investment community and have acquired shares for the FFJ Portfolio.

 

Summary

  • Moody’s (MCO) and S&P Global Inc. (SPGI) command a ~80% market share of the ratings industry.
  • I view these two companies much like I view the VISA and Mastercard oligopoly.
  • MCO released less than stellar Q3 results on October 26th. Its share price has been taking a beating subsequent to the last week of July with a dramatic pullback evidenced starting mid-September.
  • Berkshire Hathaway has held a position in MCO since it went public in 2000 and has increased its holdings over time. As at June 30, 2018 it held in excess of 24.6 million MCO shares.
  • The time to invest in high quality companies such as MCO and SPGI is when business conditions are challenging.

Introduction

The reasonably broad pullback we are currently witnessing is, in my humble opinion, long overdue. I honestly have no idea when it will end but I am viewing the pullback like an early Christmas gift.

This brings us to the topic of this article - Moody’s Corporation (NYSE: MCO).

I can totally appreciate why the investment community has hammered MCO’s stock price and in particular on October 26th when it released its Q3 results. Its results were less than stellar!

Investors with a long-term investment time horizon, however, will keep in mind that MCO has a strong market position and benefits from its diverse operations and strategic acquisitions.

Elevated expense levels and weakness in global bond issuances will pose a challenge in the short-term but MCO has announced measures being taken immediately to bring costs under control. Since MCO expects continued lighter debt issuance in Q4, it is undertaking cost management activities which will result in a Q4 restructuring charge of $30 - $40 million and an aggregate charge of $45 - $60 million through the first half of 2019. These cost management activities are expected to result in incremental annualized savings of $30 - $40 million.

When I analyzed MCO in my March 3rd article I indicated that its share price was a bit rich for my liking and placed it on my ‘watch list’.

Now that MCO’s share price has taken a pounding I acquired 250 shares for the FFJ Portfolio on October 26th.

I did the exact same thing when I analyzed S&P Global Inc. (NYSE: SPGI) in my March 4th article.

SPGI’s shares have taken a recent pounding and I have just acquired 200 shares for the FFJ Portfolio.

I view the SPGI and MCO oligopoly much like I view the Visa and Mastercard oligopoly. Both companies provide ratings services and more and together command a ~80% market share; Fitch is a distant 3rd with a ~15% market share.

When I read financial statements, the ratings agencies most often mentioned are MCO and SPGI. Quite often companies have conditions of credit in which the minimum permissible rating assigned by one of these two companies must be satisfied otherwise the terms and conditions of the credit facilities become more onerous. In essence, the services provided by MCO and SPGI are critical in the business world.

Berkshire Hathaway initiated a position in MCO in 2000 when Dun & Bradstreet split into 2 companies and took MCO public. I view this and the fact Berkshire Hathaway has increased its exposure over the years as a huge vote of confidence.

Quite frankly, the fact I have never previously had exposure to these two companies is somewhat mind boggling.

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By |October 26th, 2018|General Investing|Comments Off on Moody’s Corporation – The Pullback I Have Awaited Has Arrived

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