Dun & Bradstreet has been a horrible underperformer over the last few years. In an attempt to enhance shareholder value, it is in the process of separating it's Moody's subsidiary from its D&B Credit Operations via a tax-free spin-off of its Credit Operations. This distribution is expected in the third quarter.
I believe that true value of Moody's has been masked within the Dun & Bradstreet Corporation. Moody's has grown revenues at 17% per year for the last 20 years. Operating Earnings have grown at a similar rate. The worst year in the last 20 yrs was down 6% revenue. Total Assets at Moody's are only $380mn. The business has virtually zero capital needs, therefore nearly every dollar of earnings can be used to repurchase stock.
One may look at the last 20 years and say that Moody's performance was due to the bull market. However, I believe that we are only in the middle stages of an enormous global secular shift, that will benefit Moody's for years to come. The introduction of the Euro should facilitate the issuance of publicly rated debt in Europe. In Europe approximately 75% of corporate debt is financed by banks today vs. only 22% in the United States. I expect the European market, to move in the direction of the US market over time. In Japan, the combination of a very weak banking sector and corporate debt market that is 70% financed by banks provides great long term opportunities. Longer term, the growing economies in countries like Mexico, Brazil, India, even China will all look for an independent evaluator of credit risk as these emerging economies grow.
D&B operating company is a troubled business with great history and uninspiring management. Last year their core business declined slightly in the fourth quarter, this year it rebounded slightly in the first quarter. Long term there are too many changes occurring in this business for me to get excited about its prospects. They may find a way to grow the business and make it into something great, but my level of confidence is low. I know that Moody's will be there long term, but D&B is in the center of technological change and I have no idea what the internet, competitors, etc. will do to its business over time.
Valuation - I expect Moody's to earn about $1 in 2000 and $1.12 in 2001. Since this is a great business, a great brand, a duopoly, with long term growth prospects that I estimate of 12% for revenues and operating profit, I would be willing to pay 20x earnings. Not that I would pay it, but I believe that it should trade at 25x or 30x earnings, as it is one of the best businesses that I have ever seen with no capital needs.
D&B operating company last year had EBITDA of about $330mn. It will have debt of approximately $800mn applying a multiple of 6x EBITDA, leaves me with equity worth about $6 and I would look to sell it as soon as I can after the spin-off.
Finally, Warren Buffett is largest shareholder in this company so the chances of them doing anything really stupid with their cash flow is greatly reduced. Also, did I mention that Warren Buffett is the largest shareholder in this company? Lock this one away. Great businesses at fair prices will make you rich.
The spinoff of the credit operations is expected by the end of September and this should highlight the value of Moody's.