Unfortunately for the company and its shareholders, a slowdown in Moody's business can still be expected. Moody's strong results were in part a reflection of accelerated deal flow, as lenders rushed to sell their loans in the first quarter while the market for mortgage-backed securities was still strong. Moody's now projects that its U.S. structured finance unit, which provides ratings for such securities and has been the company's growth engine, will see revenue growth only in the high single digits for the full year.
For the company overall, Moody's expects to see full-year revenue growth in the low teens and earnings per share growth continue in the low double digits. While that outlook may seem impressive, it would represent a significantly slower pace of growth than investors have come to expect from Moody's. In 2006, for example, revenue increased by nearly 18% and net income grew to $754 million, an increase of more than 34%.
At a recent share price of $68, Moody's stock trades at a rich multiple of more than 26 times earnings. That lofty valuation may now appear harder to justify. In addition to slowing growth, Moody's is facing declining operating margins as a result of its decision to increase its expense base in order to expand capacity -- especially its operations in overseas markets. In the long run, however, those expenditures will enhance Moody's reputation and expertise and help secure its dominant position in the global ratings business. That bright future is certainly an important reason Moody's shares can still command a premium multiple.
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