Wednesday, December 5, 2007

finally a new post

Well its almost been a week since the last post -- man that sucks. I keep hoping I will find the time but then too many other issues pop up.

Interesting times to say the least. My thumb sucking on BOOM has led that stock into the 60's last I checked -- nice move. Oh well. I also thumb sucked on FDS -- a stock I own and hoped to buy more of but kept waiting for a lower price then $60 -- today it was around $65. TECH is another stock I have been watching and waiting to buy more of -- a week ago it was in the $62-63 range but I still didn't buy and by the end of today it was near $67.

In the case of FDS and TECH there are 2 reasons why I held off buying more -- MCO and LMNX/QGEN.

MCO or Moody's is a great franchise -- they own a toll on the issuance of debt. The issuer pays a fee to have Moody's rate the debt and then publish their ratings for all to see for free -- interesting model. Most pick on them for conflicts of interest and everyone rails against their horrible ability to predict the future -- yet they are a valuable tool for fixed income investors just like I believe equity sell side research is a valuable tool for investors when used properly (unlike how they were used in 1999-2000). Anyway, MCO has 50% operating margins and no real capital requirements so the business has enormous returns on capital and thanks to the constant growth in debt throughout the world -- they have demonstrated consistent growth in revenues over the last 20 years (1994 the one exception). Right now the low end of estimates says next year they will earn around $2.10, which equates to an 17 or so PE using $36 price. That said, don't forget that estimates have been dropping and the idea the stock is cheap can only be based upon the idea that future earnings power is near these numbers -- take EPS down to $1.50 and the stock is expensive.

The stock is down 50% from its highs -- so right away my interest perks up because this HAS BEEN an incredible secular growth stock that is now at a half off sale. But that's just a starting point -- questions to be answered: what about lawsuits and all the other regulatory talk? what about conflicts of interest -- will business model change? Will there be any new competition or any other reason for margins to decline? What will growth be like in the future -- has there been well above normal growth that will need to normalize i.e. experience a slow period? At what point is the stock low enough to buy?

I would love to be able to talk to the sell side analysts at this point to find out what investors believe -- what are they asking about -- if they are questioning the franchise because of concerns about rating agencies conflicts and how their ratings have been wrong, then I want to buy with both hands. If they are dispassionately noting that debt issuance is likely to grow much slower for a few years and that 2008 will see sharp declines in structured products that will drag down estimates below $2, then I might nibble. If they remain too bullish because they refuse to give up on the wonderful story Moody's has been, then I want to stay away.

A reasonable case is that 2008 stinks but after that debt issuance picks up again and in 3-5 years the company is able to earn $2.7 to 3 bill in revenues, which translates into $1.3 to 1.5 bill in operating profit or about $3.40 in EPS assuming they continue to use their free cash flow to buyback stock. I could easily make the case that the stock will double from here in the next 3-5 years. I could also make the case that the stock will continue to fall into the 20's as issuance continues to drop and they face margin pressure -- this is an industry not used to competing on price but also not used to facing declining revenues either. I could make a best case and assume they reach more like $4 bill in revenues in 3-5 years. That could drive a stock price over $100 or a triple from here.

still thinking about this one but its not often someone holds a half off sale on a business with this kind of profitability. Still to circle back to my original point -- to me exposure to MCO is exposure to capital markets which FDS also provides in a certain way so I would rather not add to FDS AND buy MCO -- need to decide on MCO and if its a No then there is no reason not to add to FDS.

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