The analysis below first appeared in Motley Fool CAPS back in February. Click here for more CAPS coverage from this contributor on 40 stocks in the financial services sector.

Moody's (NYSE:MCO) is among the world's most-respected, widely utilized sources for credit ratings, research, and risk analysis. Moody's independence and integrity has earned the trust of capital market participants worldwide and also publishes market-leading credit opinions, deal research and commentary, serving more than 9,000 customers at some 2,400 institutions around the globe.

Moody's credit-rating business is less asset sensitive, with strong cash flows being used for share buybacks and acquisitions. Though credit rating contributes 92% of the revenue, the company is also trying to venture into new areas like research, risk management, and analytics through acquisitions. Credit derivatives had been the major driver of revenues performance in 2006, and global debt issues increased by 22% over the past five years. The transaction-based business model has also helped in billing, as it has an advantage over the traditional subscription-based model.

The housing market slowdown is likely to be offset by the securitization of the credit card business. Growth potential is expected from the structured finance and other complex debt offerings, where it can charge a premium of up to three times the plain vanilla ones. The Securities Industry and Financial Markets Association foresees a 4.3% drop in overall debt issuance for the U.S. markets in 2007. With almost two-thirds of the company's revenue coming from U.S. operations, this is an area of concern.

Moreover, the new legislation by Congress with the intention of reducing the concentration of power within the existing rating agencies would result in new competitors after the enactment of law, starting June 2007. Though the fundamentals are good with superior margins and excellent growth prospects, the stock currently looks overpriced, and the chance of beating the market seems dim.

Moody's is a Stock Advisor recommendation.

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