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Moody's Inc. (NYSE:MCO) released earnings before the bell on Friday May 3rd. Ahead of this report, Bloomberg is reporting that Warren Buffett's Berkshire Hathaway has sold 1.75 million shares last week at prices between $59.93 to $60.94. Buffett has been steadily selling his stake since 2009 when he reported owning 48 million shares. After this recent sale, Berkshire Hathaway is left with 26.7 million shares and remains Moody's largest shareholder (check out Buffett's high upside picks). However, with recent earnings, it's time to evaluate the next move for Moody's shareholders. The stock is, after all, still up 21% in 2013.

Recent results (1Q 2013)

  • Revenue up 13% year over year
  • Operating income up 4% year over year
  • EPS up 9% year over year
  • Fiscal year 2013 EPS guidance range is now $3.49 to $3.59, but analysts expect EPS to come in at the low end of the range at $3.51

Overview

Moody's is the second-largest credit rater after Standard & Poor's. The company is divided into two segments - Moody's Investors Service and Moody's Analytics. Moody's Investor Service is a leading provider of credit ratings, research and analytics. The firm's ratings and analysis track debt covering more than 115 countries, 10,000 corporate issuers, 22,000 public finance issuers, and 82,000 structured finance obligations. Moody's Analytics offers tools for measuring and managing credit risk.Moody's has a current market cap of $13.59 billion.

Moody's pays investors a 1.5% dividend yield with an annual dividend of $0.80 cents per share. Of the analysts that follow the stock, 1 has it rated as a strong buy, 3 a buy, 4 a hold, and 1 a sell. Price targets for the stock range from $28 to $62 with $58 being the median target, which is 3% below the current trading range.

Outlook For Growth

Moody's was greatly impacted by the 2008-2009 recession. Credit markets froze and demand for new issues and Moody's ratings deteriorated. Going forward, Moody's is highly dependent on a global recovery and the issuance of credit. According to Moody's 10-K:

Moody's growth is influenced by a number of trends that impact financial information markets including...

• Health of the world's major economies;

• Debt capital markets activity;

• Disintermediation of credit markets;

• Fiscal and monetary policy of governments;

• Changing regulatory requirements; and

• Business investment spending

Shares Fully Valued

After the stock's impressive run over the last few years, I think it's time for investors to sell and that the shares are fully valued. For one, the business of Moody's is an extremely profitable one. However, competition is increasing. According to Moody's,

In addition to Standard & Poor's, Moody's Investor Services' competitors include Fitch Ratings, Dominion Bond Rating Service Ltd., A.M. Best Company Inc., Japan Credit Rating Agency Ltd., Kroll Bond Rating Agency Inc., Morningstar Inc. and Egan-Jones Ratings Company. In Europe, examples of competitors include Euler Hermes Rating, Feri EuroRating, Creditreform Rating, PSR Rating, ICAP Group and Companhia Portuguesa de Rating. There are additional competitors in other regions and countries, for example, in China where Moody's operates through a joint venture. These competitors include China Lianhe Credit Rating Co Ltd., Shanghai Brilliance Credit Rating & Investors Service Co Ltd., Dagong Global Credit Rating Co Ltd. and Pengyuan Credit Rating Co Ltd.

Moody's Analytics competes broadly in the financial information industry against diversified competitors such as Thomson Reuters, Bloomberg, S&P Capital IQ, Fitch Solutions, Dun & Bradstreet, IBM, Wolters Kluwer, Sungard, SAS, Fiserv, MSCI and Markit Group among others. MA's main competitors within RD&A include S&P Capital IQ, CreditSights, Thomson Reuters, Intex, IHS Global Insight, BlackRock Solutions, FactSet and other smaller boutique providers of fixed income analytics, valuations, economic data and research.

The reason for this increased competition is that Moody's completely missed the U.S. housing bubble. Competitors see that Moody's reputation has taken a hit and are working to compete more aggressively with Moody's. The company is now vulnerable to competition where it wasn't in the past. Moody's has also recently just taken a hit to its reputation by not giving Apple Inc. (NASDAQ:AAPL) the top credit rating of Aaa. Instead Moody's assigned Apple a rating of Aa1. If a company with no debt and $150 billion in cash doesn't deserve the very top rating, in my opinion the ratings offered by Moody's have no value and serve no purpose. According to Moody's,

We assigned Apple a Aa1 rating and not a Aaa rating for three main reasons: the business risk inherent in the consumer technology sector; the potential for the company to adopt an increasingly shareholder friendly financial policy; and the possibility that the company's diminishing US cash holdings will eventually require it to issue more debt to meet shareholder payouts.

The numbers

In looking at Moody's from a valuation perspective, the stock appears to be trading above other notable peers.

 Moody'sMcGraw-HillDun & Bradstreet
Forward P/E15.714.810.7
Price to sales4.973.292.36
PEG ratio1.351.271.27

Assessment

I think investors should follow the Oracle's lead and exit Moody's stock. However, as part of the variant view, Buffett still has a relatively large stake in the company, and there are a couple of other top name hedge funds with a large part of their portfolio concentrated in the stock. These include Jeff Ubben's ValueAct Capital, which had 9.63% of its portfolio invested in the stock going into 2013 (check out Ubben's picks). Meanwhile, Akre Capital had Moody's as its third largest public equity holding, making up 7.86% of its portfolio (see Akre's top picks).

For more aggressive traders, I wouldn't mind making Moody's a long-term short. The company has proven time and again that its ratings have no value. It's only a matter of time before the company starts losing more market share to its competitors. Moody's shares are a sell in our opinion.

Source: Billionaire Buffett Trims Moody's Stake, Now It's Your Turn