Moody's Is Overvalued

| About: Moody's Corporation (MCO)

Moody's Corporation (NYSE:MCO) reported a 41 percent jump in quarterly profit on Friday and raised its full-year earnings forecast for the second time in six weeks on a wave of new debt issues, many from corporations looking to cut their interest expense.

Revenue from corporate ratings increased 71 percent from a year earlier. Moody's net income rose to $183.9 million, or 81 cents per share, from $130.7 million, or 57 cents per share, a year earlier, according to the company.

A total of $113 billion of speculative grade debt was issued worldwide in the third quarter, up nearly four-fold from a year earlier, according to Thomson Reuters data.

The ratings companies continue to pay for mistakes they made by putting top grades on securities tied to subprime mortgage loans. Costs for complying with proposed new regulations in the United States and Europe continue to rise, Moody's said.

Still, Moody's boosted its outlook for full-year 2012 profit to a range of $2.95 to $3.05 per share, up about 7 percent from a range of $2.76 to $2.86 it forecast on September 12.

The company now expects full-year revenue from bond ratings to increase in the mid-teens in percentage terms, up from the high single-digits it forecast in September. The new full-year outlook points to an increase of about 20 percent over 2011 earnings of $2.49 cents a share.

Net income has increased 1.9% year-over-year on average across the last five quarters. The biggest gain came in the most recent quarter, when income climbed 40.7% from the year-earlier quarter.

Expenses were up 25%, which Moody's attributed to higher accruals of incentive compensation and its profit-sharing plan, as well as increased headcount both from the growth of the business and acquisitions.

Valuations

On a short-term multiplier model basis, Moody's is overvalued. On an absolute multiplier model basis, Moody's is overvalued. The firm trades at 19 times earnings and 4.5 times sales.

Conclusion

Moody's financial performance and position are solid. Investors should decrease long common equity exposure based on the valuations. Traders should short sell common equity shares of Moody's. Investors can repurchase shares on a substantial decline in price.

Disclosure: I am short SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: This article is not meant to establish or continue an investment advisory relationship. Before investing, readers should consult their financial advisor. Christopher Grosvenor does not know your financial situation and ability to bear risk and thus his opinions may not be suitable for all investors.