MCO

MCO was back below $38 for a time today -- it closed at $38.5. Been doing more thinking on the issues.

1994 -- the last year the company experienced a down revenue year is included in a slide on a presentation available at their website -- it shows a 9% compound annual growth rate in revenues from 1992 -- 1996. So that period includes the peak year of 93, a down year in 94, a rebound in 95 and more growth in 96. they don't provide specifics but they do provide a log based chart and it seems to me that in 95 they got close to 93 levels but didn't beat them and in 96 they went to new highs.

That translates to 2006 = 1992 with 2007 being the peak year followed by a decline in 2008 and rebound years in 2009 and 2010 so that they are at new levels of growth in 2010. If you follow these numbers and assume a similar 9% growth rate from 2006 to 2010, then revenues in 2010 are about $2.875 billion. That translates into EPS of roughly $3.25 to $3.50 in 2010. Assume a 20-22 PE on those numbers and the stock could be around $70 -- not bad vs. $38.50 today. That's only 2 years away (we are using 2008 EPS estimates for valuation purposes now so 2 years from now we will be looking at 2010 numbers) to double your money.

What is the downside?

a. business model changes because forced to abandon issuer pays model. Stock would get cut in half again because the business would shrink dramatically. low probability but 50% loss potential (guess).

b. litigation expenses and or potential losses if courts rule they don't just issue opinions but rather guarantees -- if they lose the court case see risk a. -- big loss because the business model would be broke. Higher expenses due to litigation is one thing -- it hurts but its not that big of a deal -- losing a case means potentially losing the franchise.

c. competition in structured products ratings due to loss of credibility -- this means somewhat lower margins -- say 40% instead of 50% and less revenue growth because they are sharing more with competitors. No idea on downside -- say 25%.

d. Growth in debt issuance world wide slows to the point that Moody's revenues are still flat with 07 numbers in 2010. The great deleveraging people talk about that would hurt their revenues. Its possible -- this is the highest probability risk, yet I still think its a low number. economic growth leads to growth in debt -- its that simple -- very highly correlated so either we end up with no GDP growth for awhile (next few years) or most developed economies change dramatically away from debt. This means a flat to down stock price -- probably somewhere in the mid 20's soon and maybe $40 in 2010.

So let's say the downside from thursday's close is 33% and the upside is somewhere between 50-150% over the next few years. Good chance I'm early to the story but that is why I will buy small to start. Will dip a toe and wait for more info -- most likely bad -- then buy more when the stock dips towards $30. That's my guess. Key for me is their franchise is in tact in my mind -- they will remain a toll keeper on the growth in debt. International markets will ensure that debt grows nicely.