Something funny happened at Moody's (NYSE:MCO) last quarter: The debt rater failed to beat earnings estimates. It was the first time this had happened since way back in Q1 2000, and when investors look to Moody's Q2 2006 earnings report tomorrow morning, they'll be hoping it was the last.

What analysts say:

  • Buy, sell, or waffle? Fourteen analysts follow Moody's, with five rating it a buy and nine a sell.
  • Revenues. Analysts estimate sales grew 9% to $486.8 million in the quarter.
  • Earnings. Profits are predicted to beat that growth rate and rise 12% to $0.55 per share.

What management says:
In June, Moody's hosted its first "Investor Day," aiming to introduce itself to investors who might have missed it when the firm was first set up in 1900. There, the firm provided an update on its guidance for fiscal 2006, predicting that it would grow its revenues at a rate approaching or hitting double digits, even as investments in its business drag operating margins down by as much as a full percentage point.

But how, you might ask, can 9% or 10% sales growth translate into profits that grow even faster, if margins are shrinking? Answer: by reducing the number of shares outstanding, among which those profits get divvied up. Moody's plans to do this by continuing to repurchase its shares. The firm confirmed that it almost used up the $654 million remaining in its repurchase authorization during Q1, and is adding authorization to repurchase another $2 billion worth of shares. All told, the expiring and the new buyback authorizations, if exercised in full, could theoretically remove nearly 17% of Moody's shares from circulation.

Perhaps bigger news for Moody's -- although not of its own making -- is a bill now before Congress that would help lesser-known credit ratings agencies compete more effectively with Moody's. For more detail on this subject, read the write-up prepared by fellow Fool Alex Dumortier late last month.

What management does:

Margins %

12/04

3/05

6/05

9/05

12/05

3/06

Op.

54.7

55.6

55.8

55.8

54.3

54

Net

29.6

29.4

30.4

32.3

32.4

33


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

The Fool says:
 Motley Fool Stock Advisor co-analyst Tom Gardner, who recommended Moody's to subscribers as his very first pick back in April 2002 (speaking of which, the shares have nearly tripled in value since then), is less enthusiastic than Moody's is about buying Moody's shares.

Although he rates the company an "A" for business prospects, Tom cautions that Moody's "is one of the most richly priced stocks" in his collection. At today's prices, Tom doesn't expect the company to beat the market by much going forward.

Competitors:

  • McGraw-Hill (NYSE:MHP)
  • Dun & Bradstreet (NYSE:DNB)

Customers:

  • Insure.com (NASDAQ:QUOT)

Suppliers:

  • EDGAR Online (NASDAQ:EDGR)
  • Syntel (NASDAQ:SYNT)

So if Tom doesn't think you should buy more Moody's today, what does he suggest buying? Find out in the August issue of Stock Advisor. It's yours for the perusing, free, just for trying out the service.

Fool contributor Rich Smith does not own shares of any company named above.