Moody’s Corporation Fundamental Analysis

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Moody’s Corporation

Last Updated: 19 Nov 2022

NYSE: MCO

GICS Sector: Financial Services

Sub-Industry: Financial Data & Stock Exchanges

https://www.moodys.com

Management

Moody's Corporation Management

CEO: Rob Fauber

Tenure: 2.1 years

Moody's Corporation's management team has an average tenure of 3.1 years. It is considered experienced.

Source of Revenue

Moody's Corporation Source of Revenue

Moody's Corporation operates as an integrated risk assessment firm worldwide. It operates two reportable segments, Moody’s Investors Service and Moody’s Analytics.

Moody's Investors Service (MIS) publishes credit ratings and provides assessment services on a wide range of debt obligations, programs, and facilities, and the entities that issue such obligations in markets worldwide, including various corporate, financial institution and governmental obligations, and structured finance securities. A rating from MIS enables issuers to create timely, go-to-market debt strategies with the ability to capture wider investor focus and deeper liquidity options.

Ratings revenue is derived from the originators and issuers of such transactions who use MIS ratings to support the distribution of their debt issues to investors. Ratings are disseminated via press releases to the public primarily through a variety of electronic media, including the internet and real-time information systems widely used by securities traders and investors.

MIS also earns revenue from certain non-ratings-related operations, primarily consisting of financial instruments pricing services in the Asia-Pacific region, ESG research, data, and assessments and from ICRA's non-ratings operations. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.

Moody's Analytics (MA) is a global provider of i) data and information; ii) research and insights, and iii) decision solutions. MA leverages its industry expertise across multiple risks such as credit, market, financial crime, supply chain, catastrophe, and climate to deliver integrated risk assessment solutions that enable business leaders to identify, measure and manage the implications of interrelated risks and opportunities. MA’s proprietary data, research and analytics combined with cloud-based software tools deliver solutions to meet customer needs as they arise. MA’s subscription businesses provide a significant base of recurring revenue to mitigate cyclical changes in debt issuance volumes that may result in volatility in MIS’s revenues.

Moody’s Corporation Reportable Segment Revenue

Moody's Corporation Economic Moat

Economic Moat: Wide

There are many ways to identify Moody’s Corporation’s economic moat, but I focus on the above 5 types. The rating is purely subjective and based on my in-depth understanding and analysis of Moody’s Corporation. Please check my summary to understand more about the economic moat.

Performance Checklist

Moody's Corporation Performance Checklist

Is Moody's Corporation's revenue growing YoY for the past 5 years consistently? Yes.

Is the net income growing YoY for the past 5 years consistently? Yes.

Is the cash flow from operating activities growing YoY for the past 5 years consistently? Inconsistent.

Is the free cash flow positive for the past 5 years? Yes.

Is the gross margin % consistent/ growing for the past 5 years? Yes.

Is the EPS growing for the past 5 years? Yes.

Moody’s Corporation Fundamental Analysis | Moody’s Corporation Revenue, Net Income, Operating Cash Flow, and FCF | Fundamental Analysis by The Globetrotting Investor

Moody’s Corporation Revenue, Net Income, Operating Cash Flow, and FCF (USD Million)

Is the free cash flow per share growing for the past 5 years? Yes.

Moody's Corporation FCF per Share

Management Effectiveness

Moody's Corporation Management Effectiveness

Is Moody's Corporation’s ROE consistently at 12%-15% YoY for the past 5 years? Yes.

Moody's Corporation’s current Return on Equity is 63.9%. This metric is probably skewed due to their high level of debt.

Is the ROIC consistently at 12%-15% YoY for the past 5 years? Yes.

Moody’s Corporation Return on Invested Capital vs Weighted Average Cost of Capital

The trendline for the number of shares outstanding is declining, which is something that an investor would be pleased to see.

Moody’s Corporation Fundamental Analysis | Moody’s Corporation Shares Outstanding | Fundamental Analysis by The Globetrotting Investor

Moody’s Corporation Shares Outstanding (Million Shares)

Moody's Corporation Financial Health

Moody’s Corporation Financial Health (USD Million)

Current Ratio: 1.8 (pass my requirement of >1.0)

Debt-to-EBITA: 3.18 (fail my requirement of <3.0)

Interest Coverage: 9.03 (pass my requirement of >3.0)

Debt Servicing Ratio: 16.83% (pass my requirement of <30.0%)

Dividend

Moody's Corporation Dividend

Current Dividend yield: 0.96%

Have the dividend payments been stable for the past 5 years? Yes.

Have the dividend payments been growing for the past 5 years? Yes.

Moody’s Corporation's dividend payments are reasonably covered by its earnings and its cash flows.

Moody's Corporation Valuation

Estimated intrinsic value: $190.88

Value is calculated using discounted cash flow method (taking into account their cash and debt) and scenario planning.

Projected growth rate: 10% - 12%

Beta: 1.23

Discount rate: 8.0%

Date of calculation: 19 Nov 2022

Moody’s Corporation Price-Earnings Ratio vs its peers

Moody’s Corporation Historical Price-Earnings Ratio

Additional Resources

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Moody’s Corporation Stock Performance

Moody's Corporation Stock Performance

The following graph compares the total cumulative shareholder return of Moody's Corporation to the performance of Standard & Poor’s 500 Composite Index and the Russell 3000 Financial Services Index.

The comparison assumes that $100.00 was invested in Moody's Corporation common stock and in each of the foregoing indices on December 31, 2016. The comparison also assumes the reinvestment of dividends, if any.

Moody’s Corporation Stock Performance

My Top Concern

Moody’s Corporation conducts its business in various countries outside the U.S. and derives a sizeable portion of its revenue from foreign sources. Changes in the economic condition of the various foreign economies in which the company operates have an impact on the company’s business. For example, economic uncertainty in the Eurozone may affect the number of securities offerings undertaken within those areas.

In addition, operations abroad expose Moody’s Corporation to a number of legal, economic, and regulatory risks such as 1) exposure to exchange rate movements between foreign currencies and USD, 2) uncertainty about the future relationship between the U.K. and the EU and 3) uncertainty regarding the future relationship between the U.S. and China.

Moody’s Corporation’s reputation and the strength of its brand are key competitive strengths. Any factors that damage the company’s credibility may impact Moody’s Corporation’s business and profitability. It will also make it difficult for Moody’s Corporation to find suitable candidates for acquisition.

Summary for Moody’s Corporation

Summary for Moody's Corporation

Moody’s Corporation possesses a wide economic moat due to its intangible assets, and network effects, which are primarily present in its ratings business.

Moody’s Investor Service segment provides credit ratings to bond issuers as well as bond investors, creating a robust network effect. Bond issuers value credit ratings from companies such as Moody’s and S&P Global because of their wide acceptance among investors.

One important application is cross-border bond issuance deals. While a local domestic rating agency can value its domestic bonds, a rating from Moody’s Corporation will be more meaningful for cross-border marketed security, as global investors seek broad comparability across global bonds. For example, an investor will want to know if an A+ rating for a company in Singapore is the same as an A+ rating for a company in London or an A+ rating for a company in New York.

In addition to bond investors and issuers who utilise these credit ratings, there are index providers, governments and regulators who value Moody’s Corporation’s credit ratings. One such regulator is the banking regulator which uses rating agencies to determine a bank’s capital adequacy. Such wide acceptance increases Moody’s Corporation’s network effects.

Besides having strong network effects, the long track record of allowing investors to see how credit ratings are performed results in Moody’s Corporation’s intangible assets. Regulations also strengthen its intangible assets. A ratings provider must meet certain standards set by the SEC before receiving a recognised statistical rating organization designation.

The network effect and intangible assets are two powerful determinants in Moody’s Corporation business model that led me to assign a wide economic moat for the company.

Moody’s Corporation’s overall performance looks satisfactory, with its revenue and net income growing over the past 5 years. The gross profit margin is also in a healthy range, above the industry average. The company’s net margin has been increasing over the past 5 years to a level that is above the industry average as well. Despite inconsistency in its operating cash flow, I would not be much concerned about it as the dip happened during the pandemic.

Both Moody’s Corporation’s ROE and ROIC are above 15% consistently over the past 5 years, suggesting that the company is efficient in allocating its capital. Its current ROE is at 63.9%, which is probably skewed due to its high level of debt. Moody’s Corporation’s current ROIC, which is one of the highest within its industry, is roughly two times higher than its WACC.

However, Moody’s Corporation’s balance sheet does not look good. It failed my requirement for the debt-to-EBITA metric, and it barely passed my interest coverage metric. This suggests that Moody's Corporation’s interest payments on its debt may not be well covered by EBIT. Its net debt-to-equity ratio is also considered high.

Despite being a wide-moat company, I will still assign a margin of safety of 35% due to its balance sheet. So, with an estimated intrinsic value of $190.88, I will only purchase the stock when it is trading at a range of $125.

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Moody’s Corporation Fundamental Analysis