Bailey Pemberton
4 min read
Moody’s has delivered a strong 64.0% share price gain over the past three years, which puts a bright spotlight on what kind of returns the ratings and analytics business is actually earning on the capital it deploys. With that backdrop, the live question is whether the current valuation matches the returns Moody’s is generating inside the business, or whether the share price has moved ahead of those economics.
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A 64.0% rise over three years puts real weight on the idea that Moody’s underlying returns on capital need to be strong enough to support that kind of re-rating.
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Recent commentary from the chief credit officer that higher interest rates and persistent inflation are changing how Moody’s assesses leverage, pricing power and geopolitical risk may support shifts in where and how the company invests its capital to sustain attractive returns.
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If you’d rather focus on earnings, this one’s for you. See what Moody’s’s 28.9x 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 currently trades.
If you are considering whether Moody’s recent 64.0% three-year gain is well supported by the returns it earns on capital, it can help to compare that theme against 29 high quality undervalued stocks.
Is Moody’s Getting Expensive on Excess Returns?
The Excess Returns model looks at how much profit Moody’s generates over and above the return investors typically ask for on its equity. On this view, the business profile is punchy. Book Value sits at $18.95 per share, while stable EPS is estimated at $19.64 per share, which implies earnings power that already exceeds the current equity base. With an Average Return on Equity of 83.14% and a Cost of Equity of $1.90 per share, the implied Excess Return of $17.74 per share frames Moody’s as a company that extracts a lot of value from each dollar of shareholder capital.
Those future economics rest on stable Book Value projections of $23.63 per share, backed by analyst expectations for both book growth and earnings to move in step. The Excess Returns model puts Moody’s estimated intrinsic value modestly below the current share price of $483.45. This suggests the market is already paying up for that high return profile. Because higher rates and inflation are changing how Moody’s thinks about credit risk, the repricing of leverage and pricing power may help explain why investors accept only a small gap between price and estimated worth today. Find out what Moody’s could be worth using our Excess Returns estimate.
