Moody's Corporation

This is The Conviction Play. Moody's Corporation, credit ratings and risk analytics.

Moody's charges the issuer for the credit rating that lets it borrow. Not the investor. The company being judged buys its own rating, because it is the one that needs admission to the market.

Most moats are things a company owns. A better product, a bigger network, lower costs. A competitor can attack each of those by building something better. Moody's has a rarer kind: its moat is written into other people's documents. About ten firms are registered with the American regulator as recognised rating organisations, a designation that takes years of audited credibility to earn, and in practice three of them dominate. The rating is not a product somebody chooses. It is a permission.

Once you see the moat the economics stop being surprising. The fee is measured in basis points against a financing that can run to a billion dollars, so it barely registers beside the cost of not being rated at all. That is what pricing power looks like when the charge is tiny relative to what it unlocks.

There is a quirk worth understanding, because it is exactly why the company fails one of our five tests. It needs so little capital that it can return most of what it earns, mainly through buying back its own shares. But when a company repurchases stock far above book value, it spends more cash than the accounting value of the equity it retires. Do that for long enough and book value per share goes backwards, even while earnings and free cash flow per share compound. The flaw is the feature.

The strongest argument against it is not artificial intelligence. It is that some of the earnings behind today's results may have been pulled forward. Management said activity moved into the second quarter without changing the full-year outlook, which leaves less visibility on the underlying run rate, and the company is buying back stock aggressively into that uncertainty.

It passes four of the five structural tests. Per-share value creation is the limiter, for the buyback reason just described, so it is assessed and not in the series.

One disclosure. The author holds a position in Moody's, built in stages, and may add to it or reduce it without notice.

The full piece on Moody's Corporation is on the site, with the twelve-year earnings record as a chart. Free, no email address, no paywall, at the conviction play dot com.

A note before we finish. This episode is narrated by a synthetic voice, not by the author. It is an assessment of business quality, not a view on the share price: nothing here is a valuation, a price target, or a recommendation to buy or sell anything. A company that does not clear our bar can still be a fine business and a fine investment, and we publish what we do not grade, with the reason, because an assessment that only speaks about its winners is marketing. The Conviction Play publishes general commentary for information only. It is not investment advice, and capital is at risk. This reflects what was known on the day it was recorded.

That was Moody's Corporation, from The Conviction Play. Thank you for listening.