McGraw-Hill, Moody’s Risks Rise After S&P Cut: Chart of the Day

Standard & Poor’s increased the risk of investing in the bond-rating service’s owner and its biggest competitor by taking away the U.S.’s AAA designation, according to Peter Appert, a Piper Jaffray & Co. analyst.

The CHART OF THE DAY compares this year’s performance of McGraw-Hill Cos., S&P’s parent company, and Moody’s Corp. with the S&P 500 Index. Both are higher for the year even after they sustained bigger losses yesterday than the index, which tumbled 6.7 percent in its sharpest drop since December 2008.

McGraw-Hill and Moody’s face two threats because S&P cut the U.S. government to AA+, Appert wrote yesterday in a report. The first is greater regulatory scrutiny of the rating industry, which has been criticized for flawed assessments of mortgage- backed securities during the past decade’s housing bubble.

“The perception in Washington that the rating agencies have too much power and must be ‘reined in’ will undoubtedly by reinforced by S&P’s decision,” he wrote.

The second risk is that bond sales may become more volatile as the lower rating helps slow economic growth, the report said. Assuming that occurs, revenue and earnings at McGraw-Hill and Moody’s would become less predictable as well.

These issues weren’t big enough to prompt Appert to reduce his ratings on McGraw-Hill and Moody’s. He has the equivalent of a “buy” recommendation on both stocks, which he sees as cheap by comparison with projected earnings. Yesterday’s closing prices were about 11.5 times his profit estimates for next year.

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

To contact the editor responsible for this story: Michael P. Regan at mregan12@bloomberg.net MHP US <Equity> CN MCO US <Equity> CN

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