Moody's Corporation (NYSE:MCO): Upgraded to Overweight at Piper Jaffray

Piper Jaffray is making a bold call on Moody's Corporation (NYSE:MCO) upgrading the name to Overweight from Neutral with a $31 price target (prev. $29).

Firm notes they are upgrading their rating on Moody's to Overweight from Neutral based on 1) improving near-term revenue trends, 2) rising earnings estimates, 3) easing regulatory concerns, and 4) a valuation that suggests 30% upside potential. While debt issuance activity will likely remain volatile on a month-to-month basis, with regulatory worries fading and underlying fundamentals improving, they find the
risk/reward in MCO shares increasingly compelling.

Improving near-term revenue trends. New issue volumes have been exceptionally robust thus far in 3Q, reflecting particularly strong trends in the investment grade and high yield markets. Domestic August volumes were up 49% y/y, following July's 22% gain. Investment grade issuance was up 38%, with high yield (a higher fee category for the rating agencies) up 133%. Piper's sense is that September is starting equally strong. Low rates, narrow spreads, and healthy investor appetite for debt securities is driving this issuance activity. While activity in the structured finance market has rebounded modestly from the lows of 2008, Piper notes that run-rate issuance activity in the asset-backed market remains nearly 90% below peak levels, with mortgage-backed issuance 60% below peak levels.

Rising earnings estimates. Based on the upward momentum in revenues, Piper is boosting their 2010 EPS estimate to $1.90 from $1.85 (guidance is $1.75-$1.85), 2011 to $2.08 from $2.04, and 2012 to $2.40 from $2.35. With some of the upside in 2010 issuance volumes a function of early debt refinancing to take advantage of the current rate environment, a portion of the 2010 revenue upside is likely coming out of 2011-2012. However, they are maintaining what they believe to be appropriately cautious expectations for revenue growth in 2011 and 2012.

Easing regulatory concerns. Completion of the financial reform process with passage of the Dodd-Frank bill and the SEC's recent decision (on 8/31/10) to drop the potential fraud case outlined in a May 2010 Wells Notice substantially lessen the regulatory overhang that has negatively impacted valuation of MCO shares for the past two years. With much greater regulatory clarity now in place, Piper believes MCO can adapt its business practices to the new regulatory environment with minimal disruption to profitability. The attached exhibit provides details.

Notablecalls: First Moody's upgrade in a long time. The sentiment in these credit rating shops has been just terrible. Regulatory concerns, Buffett selling to name a few.

And now we have an upgrade. Not exactly a tier-1 firm but Piper does carry some weight. The analyst has been on Neutral for quite some time.

Don't chase it too hard pre/open but worth keeping on the radar. Stock will be up 5-7% today.