Mr. Market loves consistency. And when it comes to consistency, few companies are more practiced at providing it than Moody's (NYSE:MCO). Quarter in and quarter out, whenever Wall Street's Wise Men predict the company will earn one thing, the company comes out and beats the estimate. It's been doing this since Q1 2000; tomorrow, we'll learn whether Moody's can extend its streak to six full years.

Wall Street Wisdom:

  • General consensus. Eleven analysts track Moody's progress. Seven of them rate the company a "hold," with one "buy" and three "sells" making up the balance.
  • Revenues. Analysts estimate that Moody's will report 14% revenue growth to $448.5 million tomorrow.
  • Earnings. Profits are expected to lag that growth rate a bit, up just 12% to $0.46 per share.

Margin watch:
With Moody's currently trading for a 2.3 price to earnings to growth (PEG) ratio, I understand the analysts rating Moody's a hold. That kind of pricing deserves some skepticism. But considering the company's enormous -- and rising -- profit margins, the three ratings I don't get are the sells. Just look at Moody's performance, on a rolling, or trailing-12-month, basis over the past 18 months.

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

71.2

71.1

73.9

73.0

72.2

71.6

Op.

53.5

54.1

54.7

54.5

54.8

54.8

Net

28.1

27.8

29.6

29.4

30.4

32.3
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Who's the real fool?:
Moody's gross margin has flowed and ebbed. Its operating margin has risen marginally, but just look at that net! Aside from a few minor pullbacks, it's just marching inexorably upward. How that justifies a sell (on anything other than valuation concerns) is beyond me. And considering the company's sterling record of leaving analyst estimates in the dust, calling Moody's a sell seems to court disaster.

Valuation metrics:
So Moody's, the business, is performing admirably. But what about Moody's stock price? The company sells for 37 times trailing earnings yet is expected to grow profits at only 15% annually (divide the first number by the second, and you'll get that 2.3 PEG mentioned above.) On a cash-profits basis, the company is valued even more richly. Over the past year, it has generated $428 million in free cash flow. Divide that into its $18.8 billion market cap, and you'll find that the company trades for 44 times free cash flow. Too rich for my blood today -- ah, but only if I had bought it when the company became Tom Gardner's inaugural pick for Motley Fool Stock Advisor. In fewer than four years, Moody's has generated 220% returns for our members, beating the market averages by 22-to-1.

Moody's is a Stock Advisor pick. Try a 30-day free trial subscription and see what other market-thumping stocks David and Tom Gardner have identified as the cream of the crop.

Fool contributor Rich Smith does not own shares of Moody's.