Structured Finance And MSCI Partnerships Will Advance Operations

Key Takeaways

• Growth in private credit and partnerships, like with MSCI, may drive significant revenue increases, especially in Structured Finance and risk assessments.
  
• Generative AI and cost efficiency programs are enhancing operations and margins, potentially boosting efficiency and net margins.
  
• Increased market uncertainty and contract attrition pose risks to Moody's revenue growth despite strong initial results, with concerns about economic slowdowns and geopolitical tensions.

Catalysts

Operates as an integrated risk assessment firm worldwide.

• Moody's is seeing strong growth in private credit, especially in Structured Finance, which is expected to be a significant tailwind for their Ratings business, likely boosting revenue.
  
• The company is actively pursuing partnerships, such as with MSCI, to provide risk assessments for private credit investments at scale, which could enhance transparency and drive future revenue growth.
  
• Generative AI is being leveraged across customer service, sales, and engineering to improve efficiency and productivity, potentially enhancing net margins through cost reduction.
  
• Investments in product development, especially in areas like KYC and financial crime compliance, are expected to drive continued ARR growth in Decision Solutions, impacting revenue positively.
  
• Moody's is executing an ambitious cost efficiency program aimed at enhancing operating leverage, which is expected to improve net margins over the coming years.

Moody's Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Moody's's revenue will grow by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.1% today to 33.1% in 3 years time.
• Analysts expect earnings to reach $2.9 billion (and earnings per share of $16.69) by about April 2028, up from $2.1 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.9x on those 2028 earnings, up from 36.7x today. This future PE is greater than the current PE for the US Capital Markets industry at 23.1x.
• Analysts expect the number of shares outstanding to decline by 1.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.24%, as per the Simply Wall St company report.

Moody's Future Earnings Per Share Growth

Risks

• There is increased market uncertainty driven by equity market volatility, making it difficult for businesses to make investment decisions, which could lead to delayed financing and impact Moody's revenue growth.
  
• The company's guidance has been adjusted to reflect potential wider economic slowdowns, indicating concern about the broader economic environment that may affect earnings.
  
• Projections for M&A volume growth have been significantly reduced from 50% to 15%, which could impact Moody's revenue from ratings of new debt issued to finance such transactions.
  
• Despite strong first-quarter results, there is an acknowledgment of ongoing risks from geopolitical tensions and trade policies that could lead to delays in customer decision-making, potentially affecting future revenue ambitions.
  
• Significant attrition in contracts, particularly with the U.S. government and in the ESG sector, could pose a risk to steady recurring revenue growth, impacting overall revenue and net margins.

Valuation

• The analysts have a consensus price target of $506.737 for Moody's based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $575.0, and the most bearish reporting a price target of just $445.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $8.8 billion, earnings will come to $2.9 billion, and it would be trading on a PE ratio of 36.9x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of $429.87, the analyst price target of $506.74 is 15.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.