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Strategies & Market Trends : Value Investing
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To: Graham Osborn who wrote (58926)1/16/2017 11:08:37 AM
From: Micah Lance  Read Replies (1) of 78656
 
Just curious, but why is their balance sheet a mess?

The only issue I could see is their low book value, but they have been buying back billions in stock over the past few years. Their debt has been rising along with this, so if they are funding buybacks with debt then that is certainly an issue.

OTOH, they are generating $1 billion in free cash flow a year and free cash flow has been rising consistently since the credit crisis. In 2008, they still generated roughly $500 million in free cash flow . Plus they have $2 billion in cash. They've averaged around 20% return on assets over the last decade as well.

Using 10% as your discount rate (their cost of capital), a very quick discounted cash flow analysis gives an estimate of around $87 a share so MCO is a little overpriced at $97/share. I could see the stock rising on the news as it could be viewed as positive news that the MBS fine issue is finally resolved and the cost can be easily covered by the cash on hand.
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