🏦📊Business Overview

🎯Key Metrics

Total: 12/17

• +2 ✅✅ Projected Operating Margin: 50.34%
• +0 ⚠️ Projected 5-Year Revenue CAGR: 6.76%
• +2 ✅✅ Last 5-Year ROIC: 23.50%
• +1 ✅ Estimated Cost of Capital: 5.86% (lower than ROIC)
• +1 ✅ Last 5-Year Shares Outstanding CAGR: -1.08%
• +1 ✅ Projected 5-Year EPS CAGR: 11.47%
• +1 ✅ Projected 5-Year Dividend CAGR: 10.20%
• +2 ✅✅ Estimated Debt Rating: Aaa
• +2 ✅✅ Morningstar Moat: Wide
• +0 ⚠️ Morningstar Uncertainty: Medium

📈 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 45–50% range. The company consistently generates returns on invested capital roughly 5x its cost of capital, a strong signal of disciplined and effective capital allocation by management. Moody’s also actively returns capital to shareholders through buybacks, steadily increasing ownership concentration. Its balance sheet is equally impressive, the interest coverage ratio is so robust that Moody’s own estimated debt rating would sit at Aaa, comparing it to similar companies.

📉 The main concern circulating in the market is the potential impact of AI on Moody’s Analytics segment. While this is worth monitoring, I believe the more structural risk lies elsewhere: a gradual erosion of trust in US-based rating agencies, driven by growing geopolitical and institutional uncertainty around the United States. This could incentivize European regulators, institutions, and capital markets to nurture their own domestic alternatives resulting in a slow-moving but potentially meaningful shift. That said, the core fundamentals remain exceptionally sound and there is little else to flag on the bear case.

The moat here is deeply entrenched because of regulatory inertia, contractual stickiness, and decades of accumulated credibility make disruption difficult even in an AI-accelerated world. That view may carry some confirmation bias, so rather than taking it on faith, let’s stress-test it against the current valuation and see whether the market is pricing in an opportunity.

📝Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value using the estimated cost of capital;
• EPS Growth – the fair value is estimated by projected the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital;
• Historical P/E – we assume mean reversion to the historical P/E values;
• Historical EV/EBITDA – we assume mean reversion to the historical EV/EBITDA values;
• Historical EV/Sales – we assume mean reversion to the historical EV/Sales values.

Cost of Capital

I’ve used the latest annual financial statement of the company, the 10-Year US bonds as the risk free rate and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity. Also, I used its interest coverage ratio and then compare it to similar companies to estimate its debt rating.

Cost of Capital: 5.86%.

This value will be used later as a discount rate in the valuation methods.

Please feel free to come up with your own values by using the tool I’ve used: Cost of Capital – The Fair Value Journal. It is and will ever be completely free 🙂

Discounted Cash Flows (Weight: 45%)

I’ve used the latest annual financial statement of the company, the analyst estimates for both revenue and margins and the cost of capital calculated previously.

Some notes on the inputs above:

• Terminal Revenue Growth – I’m using the risk-free rate (10-Yr bonds of the US), because long term the company should not grow more than the rate of the economy. I’m using the risk-free rate as a proxy to it, so the terminal growth becomes it;
• Terminal Cost of Capital – I’m assuming its Cost of Capital begins at its current estimated value and then gradually converges to the industry average;
• Initial and Terminal Tax Rate – I’m assuming it starts around its historical average and then gradually converges to the industry average.

All the other inputs were taken from the financial statement or from analyst projections.

The DCF gives us an estimated fair value of 460.78 dollars for Moody’s, slightly above its current price of 448 dollars.

Something that we can also do now is to play around with Monte Carlo simulations. What this will allow us to do is to simulate multiple DCF valuations with pre-defined ranges for each of the inputs. Each simulation will randomize the inputs between these pre-defined values. For this I also used analysts estimates.

As you can see from the above Moody’s seems to be undervalued given that its current price of 448 dollars is below P10. From these simulations we can extrapolate that there’s more than ~90% probability of Moody’s being undervalued.

Please be free, as before, to fill in your own values. Make the valuation your own and do yourself a DCF valuation using your own assumptions: DCF – The Fair Value Journal

EPS Growth (Weight: 35%)

For this valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed a 30 PE for the company.

Then again used the Monte Carlo simulations to check what happens when the input values change within a specified range:

Using this valuation method, Moody’s that is currently priced at 448 dollars seems to be undervaled being currently priced below P10. From this we can extrapolate that there’s more than ~90% probability of the stock being undervalued.

This seems to be in line with what we’ve seen during the DCF valuation.

As before, feel free to try this yourself: EPS Growth – The Fair Value Journal

Historical P/E (Weight: 10%)

The current P/E (Price / Earnings) ratio is a little below its 8 Year average. This means that the company is a little undervalued or fairly valued by this metric. Assuming a mean reversion to its historical average of 34.80 we can assume a fair value of 474.26 dollars.

For every type of historical and relative valuation you can use the same free tool: Historical / Relative Valuation – The Fair Value Journal

Historical EV/EBITDA (Weight: 5%)

The current EV/EBITDA ratio is a little below or around its 8 Year average. This means that the company is a little undervalued or fairly valued by this metric. Assuming a mean reversion to its historical average of 24.23 we can assume a fair value of 488.41 dollars.

Historical EV/Sales (Weight: 5%)

The current EV/Sales ratio is a little above or around its 10 Year average. This means that the company is a little overvalued or fairly valued by this metric. Assuming a mean reversion to its historical average of 10.24 we can assume a fair value of 417.38 dollars.

✍️Summary

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, given your confidence in the company, but for me I’ll probably would start buying at around 482.92 dollars given my confidence that Moody’s will maintain still its wide moat, even if reducing a little bit its margins, over the AI revolution.

Overall it seems Moody’s is undervalued at the current prices.

Fair Value: 551.41 dollars