NEW YORK (AP) — A stock analyst his ratings on Moody's and McGraw-Hill on Wednesday, saying that a federal lawsuit against McGraw Hill's Standard & Poor's Ratings Services is not a threat to the companies' debt rating agencies.
On Tuesday the Obama administration accused S&P of refusing to warn investors that the housing market was collapsing in 2006 because it would be bad for business. The Justice Department accused S&P of knowingly inflating its ratings of risky mortgage investments that helped trigger the crisis. It's demanding $5 billion in penalties.
S&P called the lawsuit "meritless."
McGraw Hill's stock has fallen more than 20 percent since word of the lawsuit began to spread.
William Warmington Jr. of Raymond James said in a client note that he views the lawsuit as "backward looking," as it focuses on alleged transgressions that happened before the federal government imposed significant regulations on the ratings agencies following the recession that began in 2008. Because of this, he sees little risk to S&P's business model from the lawsuit going forward.
The analyst said that McGraw-Hill also has an overcapitalized balance sheet and strong free cash flow should it have to deal with potential damages or a settlement.
Warmington anticipates that the lawsuit will probably come to trial in two to three years.
He raised McGraw-Hill's rating to "Strong Buy" from "Outperform" and kept a $62 price target.
McGraw-Hill's stock shed 26 cents to $44.66 in afternoon trading.
In a separate note, Warmington said Moody's current stock price offers an attractive entry point for investors. While the analyst said it is possible that Moody's could be named in a lawsuit similar to the one that S&P is facing, he said that the ratings agencies have to date succeeded in having the majority of legal cases related to the 2005 to 2007 residential mortgage-backed and similar securities dismissed, withdrawn or dramatically reduced in scope.
Like with S&P, Warmington said any potential lawsuit against Moody's would be "backward looking." He also said that the company has sufficient liquidity if it has to deal with potential expenses related to such a lawsuit.
The analyst boosted Moody's to "Strong Buy" from "Outperform" and reaffirmed a $55 price target.
Shares of Moody's Corp. rose $1.62, or 3.6 percent, to $46.71. Over the past 52 weeks, the stock has traded between $33.86 and $55.58.
Fitch Ratings, the third major ratings agency, is privately held.