Moody's has seen its stock advance over the past few years, and investors now have to ask whether that price makes sense given the returns the business earns on the capital it deploys. A rich share chart on its own does not explain if those returns are strong enough to support paying more for each dollar invested in the company.
- Over the past 3 years the stock has returned 52.4%, which puts real weight on the question of whether Moody's underlying return on capital fully supports that kind of share price gain.
- The company relies heavily on turning its credit ratings and analytics franchises into high margin cash generation, so the durability of those margins is central to how efficiently each incremental dollar of capital can be put to work.
- What if you looked at Moody's through its earnings instead? See what Moody's's 30.6x P/E says about the price.
The issue now is whether the returns Moody's earns on its capital are strong and durable enough to justify where the stock trades today.
If you want to stress test this same question about the returns companies earn on their capital across a wider field, take a look at 33 high quality undervalued stocks.
Is Moody's Getting Expensive on Excess Returns?
The Excess Returns model looks at how profitably Moody's can reinvest shareholders' equity above its own funding cost. On this view, the company is projected to earn stable EPS of $19.70 per share against a cost of equity of $1.89 per share and book value of $18.95 per share. That implies an excess return of $17.81 per share and an average return on equity of 83.38%, which is very high compared with the equity base those earnings are being generated from.
Analysts feeding into the model also expect stable book value to rise to $23.63 per share over time, which keeps compounding those excess returns on a thicker equity layer. Even with that strong profitability profile, the Excess Returns projections put Moody's estimated intrinsic value meaningfully below the current share price of $511.08. As a result, anyone looking at the stock today is paying a full price for those projected economics. Find out what Moody's could be worth using our Excess Returns estimate.
The Moody's Narrative: What Would Justify Today's Price?
Narratives pick up where the valuation puzzle leaves off for Moody's by spelling out which future paths for earnings power, profitability and growth would need to play out for the current share price to look either conservative or stretched. Each narrative links its numbers to a clear view on how Moody's growth, margins and risk profile might evolve, giving you something specific to revisit as fresh information comes through on Simply Wall St's Community page.
Bulls and bears looking at Moody's are reading the same moat and cash engine, yet they reach different conclusions on how much is already priced in.
Bull case: 7% undervalued
According to andre_santos, an investor in the Simply Wall St Community, Moody's current share price leaves some value on the table.
"Moody's has established itself as one of the global standards in credit ratings, a status reflected in its wide economic moat and consequently stellar operating margins in the 45 to 50% range…"
Discover why this Narrative puts Moody's at 7% undervalued.
Bear case: 8% overvalued
prajeeshprathap, a Simply Wall St Community investor who wrote the Narrative, argues the quality of Moody's is clear but already richly reflected in the quote.
"At current valuations, Moody’s is not a bargain-bin stock, but high-quality compounding businesses rarely are…"
Explore why this Narrative puts Moody's at 8% overvalued.
One more Moody's check that belongs beside the price tag
Before you park Moody's in the "high quality at a full price" bucket, it is worth seeing which specific pressure points our broader checks have already picked up on beneath the surface. Take a closer look at 1 warning sign before settling on a valuation.
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