Moody's Corporation (NYSE:MCO) saw its shares fall six percent on Friday over worries of a possible federal lawsuit regarding pre-crisis debt ratings.
Last week, the U.S. government introduced a $5 billion civil suit for mortgage bond ratings against Standard&Poor's and its parent company, The McGraw-Hill Companies, Inc. (NYSE:MHP). Now the U.S. Department of Justice and numerous states are considering filing a suit against Moody's Corporation (NYSE:MCO) for defrauding investors, reported Reuters, but this may not happen until S&P's case first goes to court.
"If the question has become when, and not if, a lawsuit will be filed against Moody's, then the shares are simply unbuyable, in our view," BTIG analyst Mark Palmer said in an interiew Reuters.
But Moody's is already facing lawsuits and criticisms for high prime and mortgage ratings. Private investors, the Abu Dhabi Commercial Bank, Washington State's King County, and investors have filed fraud claims over losses from Cheyne, a structured investment product.
In addition to Moody's fall on Friday, it did report its fourth quarter earnings. The company did not talk about a possible lawsuit in its earnings conference call with CEO Raymond McDaniel. He commented that he isn't aware of the DOJ's concerns against Moody's, reported CNBC.
On a positive note, Moody's Corporation (NYSE:MCO) did forecast a strong 2013. It sees full-year earnings between $3.45 to $3.55 per share and a revenue increase in high single digits vs. 2012's 20 percent increase.
Analysts had expected earnings of $3.18 per share, excluding items.
Also in the quarter, corporate finance business revenues jumped 73 percent to $244.9 million and U.S. structured finance revenue increased 50 percent.
Fourth quarter net income increased to $160.1 million (70 cents per share), up from the previous year's $96.2 million (43 cents per share).
Revenues jumped 33 percent to $754.2 million.
With news of a possible lawsuit coupled with positive earnings, analysts did not appear too concerned.
PiperJaffray analysts kept their "Overweight" rating and wrote the following:
"Impressive 4Q operating results and strong 2013 guidance reinforce our confidence in Moody's Corporation (NYSE:MCO) fundamental outlook. While we expect investors will be focused on legal worries from the DoJ's action against MHP, we continue to like the risk/reward of MCO shares based on strong earnings momentum, impressive secular growth prospects, fading regulatory concerns and what we believe should be manageable litigation risk."
Evercore Partners has an "Equal-Weight" on the stock with a target price of $49. Analysts wrote the following of the "legal mess:"
"As we have stated for some time, investors have tended to be overly complacent on the legal risk re Moody’s. With news starting to surface that the DOJ may investigate Moody's Corporation (NYSE:MCO) as well as the new developments out of the NY State Attorney General office, shoes remain to fall on the legal front. Frankly, we question whether the government’s pursuit here may eventually impair the functioning of the global bond market and, given the decade’s long dominance of the leading rating agencies, does that eventually result in a large, overarching settlement. It remains too early, in our view, to get involved on the long side. We remain EW with a $49 PT based on DCF."