Ratings Stock Over-Rated?
Despite some high-profile ratings missteps, shares of debt rating agency Moody's are still doing very well. However, some analysts are beginning to wonder if the stock might be overvalued (sorry, it's WSJ, registration required). A few factors playing into this:
1. Earnings have grown 30% annually for the last two years. It is unlikely this will continue, with the company forecasting 15% growth for 2003.
2. If the equity market starts to pick up again, which is being forecast by many industry watchers, the bond market will be less attractive to investors. This will lead to a decrease in the amount of corporate debt issuance, which will lower the revenue generated by the rating agencies.
3. There are currently three large ratings agencies in the United States. S&P controls around 41% of the market, Moody's around 38%, and Fitch 14%. There are significant regulatory barriers to entry into this market, so their combined market share has been well protected. The SEC is considering changing that, however. It said a decision will be forthcoming by the end of this month.
Interesting to see what will happen. I think the government should remove some of its imposed regulatory entry barriers to allow for increased competition in this market. There will still be significant natural barriers to entry, and the SEC does need to oversee the ratings agencies and make sure the analysts are qualified. However some competition might shake the agencies out of their comfort zone, causing them to react more quickly with ratings changes. They are notoriously slow to upgrade or downgrade debt.
Please note, this is not a recommendation to trade Moody's stock. I do not make investment recommendations. I am not an equities analyst by trade.