Moody’s Corporation (MCO) Risks Aren’t Priced Into the Stock

Moody’s trades at 15.7 times forward earnings, making it more expensive than the broad market at 14.7 times forward earnings. The company intends to return an additional $1.6 billion to investors via share repurchases, which would cut its share count by roughly 12% if repurchases were made at the current price.

Moody’s forecasts continued improvements in its underlying business, guiding for high single digit revenue growth and slower growth in its expenses. A free cash flow projection of $850 million in 2013 leaves shares to trade at 15.88 times cash flow.

By all measures, Moody’s appears attractively priced. However, given that its earnings fluctuate with debt issuance, Moody’s could see slowing growth as rates turn higher. Additionally, the company’s legal liabilities are still in question. Moody’s and Standard & Poor’s recently settled a civil lawsuit surrounding the companies’ ratings on corporate debt and mortgage backed securities, however, the duo could face severe legal claims from state and Federal governments, as well as new, hundred million dollar civil claims.

Given that Moody’s trades for an above-average multiple, the effects of large-scale suits with regulators don’t appear to be priced in. Investors should wait for a dip before taking a position; the government has not forgotten the ratings fiasco in the mortgage market.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends Moody’s.

The article Moody’s Risks Aren’t Priced Into the Stock originally appeared on Fool.com and is written by Jordan Wathen.

Jordan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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