Moody's has delivered a 49.9% gain over the past three years, which puts a spotlight on whether the current share price lines up with the returns it earns on its capital. With the stock recently closing at US$464.23, the question for anyone looking at Moody's is how much of that performance is backed by the underlying economics of the business rather than just changing market sentiment.
- The 49.9% rise over three years means long term holders have already seen a strong payoff. That raises the stakes on whether Moody's capital returns can support today’s valuation.
- The business relies heavily on turning its analytical know how and data assets into fee based services. This means the way it reinvests those cash flows back into ratings, research and risk solutions can be critical for sustaining attractive returns on capital.
- What if you looked at Moody's through its earnings instead? See why Moody's's 28.8x P/E tells a different valuation story.
The issue now is whether the returns Moody's generates on the capital it employs are strong enough, and durable enough, to make the current share price look well supported.
To see how Moody's return on capital compares with other opportunities using similar criteria, review it alongside companies in the 28 high quality undervalued stocks
Where Does Moody's Sit on Excess Returns?
The Excess Returns model looks at how much profit Moody's can earn above the cost of its equity capital and then asks how long that advantage can last. For this stock, the inputs point to a business that generates a large gap between what shareholders are putting in and what the company is earning on that equity. Book Value is set at $17.47 per share, while Stable EPS is $19.74 per share, based on weighted future Return on Equity estimates from 8 analysts, so projected earnings per share are already above the equity base.
The model uses a Cost of Equity of $1.86 per share and an Excess Return of $17.88 per share, with an Average Return on Equity of 85.21%. Stable Book Value is $23.17 per share, sourced from 5 analyst forecasts. This implies Moody's is expected to keep compounding its equity base while earning returns that are materially higher than the required rate. Compared with a current share price of $464.23, the Excess Returns projections put Moody's estimated intrinsic value broadly in line with the current share price. Find out what Moody's could be worth using our Excess Returns estimate.
The Moody's Narrative: What Would Justify Today's Price?
Narratives on Simply Wall St pick up where the valuation puzzle leaves off by spelling out which paths for Moody's future earnings, margins and growth would need to hold for the equity to be worth materially more or less than today. Each storyline ties a fair value to a specific mix of potential catalysts and risks in Moody's business, which gives you a reference point to track which version of events is taking shape over time.
The community is broadly constructive on Moody's, although one camp sees much more upside than the other at today’s level.
Bull case: roughly fairly valued
"Over time, this creates a powerful compounding effect, the company grows earnings steadily while simultaneously shrinking its share count…"
Discover why this Narrative puts Moody's at roughly fairly valued.
Bear case: 165% overvalued
"At the Neutral scenario's 7.2% revenue CAGR, Moody's will generate $6.1B in annual FCF by FY2035…"
Explore why this Narrative puts Moody's at 165% overvalued.
For Moody's, the share price is only one piece of the puzzle
Before you decide how Moody's fits in your portfolio, it is worth checking who is actually steering the business and how their incentives line up with your interests. See who runs Moody's and how they are paid.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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