Here’s Why Soaring Profits Couldn’t Lift Moody’s Stock Out of the Doldrums

Moody’s (NYSE:MCO) may join McGraw-Hill’s (NYSE:MHP) Standard & Poor’s as a target of the Justice Department for its role in the run-up to the financial crisis, and could be drawn into a flurry of legal battles similar to the ones that depressed the earnings of financial institutions for many quarters after the government began prosecutions related to their mortgage practices.

But for now, Moody’s remains on strong footing; the firm reported Friday that fourth-quarter profit soared 66 percent, and it forecast a strong 2013.

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Net income increased to $160.1 million, or 70 cents per share, from $96.2 million, or 43 cents per share, in the year-ago quarter. Alongside income, revenue rose 33 percent to $754.2 million. The firm’s quarterly results received a boost as many firms refinance debt in order to take advantage of record-low interest rates that will give them access to cheap funding.

Growth in its global corporate finance business contributed to the overall gain, with its revenue increasing 73 percent to $244.9 million.

For the full year, Moody’s has predicted earnings in the range of $3.45 to $3.55 per share, with revenue expected to grow modestly. Analysts polled by Thomson Reuters forecast earnings of $3.18 per share…
Because the financial services company expects to experience lower growth this year at its Investors Services unit, which includes the bond rating business, the firm forecast an increase in revenue at the unit in the high-single-digit percentage range, compared with the 20 percent gain made in 2012.

However, problems could arise in the next few months with the potential to derail the company’s current upward trajectory. The U.S. Justice Department and multiple states are considering suing Moody’s for defrauding investors, as Reuters reported on Thursday. Although sources told the publication that the decision will likely be put off until the government’s case against S&P is tested in court. This is not the first such suit for the firm, Moody’s has already been sued for fraud by private investors.

Both Moody’s and S&P have faced ongoing criticism from politicians, regulators, and investors, for giving high ratings to thousands of sub-prime and other mortgage securities that quickly turned bad and contributed to the crisis.

Since the U.S. government began its $5 billion civil suit against the firm’s rival, the Moody’s shares have slumped. Even after the positive earnings report was released, shares were trading down 1.30 percent at $43.24 just before 10:30 a.m. Eastern Standard Time.

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