We are raising our estimates for Moody’s Corp. (MCO) for the fourth quarter of fiscal 2009 and full year of fiscal 2010 due to continued resurgence in the company’s results. Moody’s is an industry leader in the credit rating industry and enjoys a high organic growth rate, along with strong profit margins and cash flows. 

Results for the first nine months of 2009, although below year-ago level were better than the Zacks Consensus Estimate, reflecting an improvement in credit markets and growth in Moody’s Analytics business. 

We believe that Moody’s remains a solid franchise in rating debt instruments and will show substantial growth with its diversified credit research business model and international growth. 

The company raised its outlook for fiscal 2009, for the second time this year, due to continuing strength in corporate debt issuance. Earnings per share, is expected to range between $1.60 and $1.68, up from its previous outlook of $1.45 to $1.55. Revenues for the full year are expected to be flat year-over-year, versus the previous expectation of a decline in the mid-single-digit percentage range. Recurring revenue is expected to be stable. Moreover, the company expects bond activity to remain strong, going forward. 

Although, over the longer-term, Moody’s remains a solid franchise and will show substantial growth, we maintain a cautious approach as margins may be under pressure due to incremental costs related to regulatory issues in 2010. The company expects to incur incremental expenses of approximately $15 million to $25 million in 2010 related to regulatory issues. 

Despite signs of revival in economic conditions, a recovery in debt markets is expected to be slow as they face a tempered credit environment. Moreover, we don’t expect a major improvement in Moody’s Structured Finance business. 

Over the last five years, Moody’s shares have traded in a range of 9.9X to 36.3X trailing 12-month earnings. We reiterate our Neutral recommendation on the stock with a target price of $25.00, based on a P/E multiple of 13.8X 2010 earnings, a discount to the peer group.
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