Rising Demand For Moody's Credit Ratings Sparks Growth In Private And Emerging Markets

Key Takeaways

• Moody's expansion in credit and sustainable finance markets, along with strategic investments, positions it to capitalize on increased demand and economic growth.
  
• Integration of AI solutions and RMS is expected to enhance cross-sell opportunities and operational efficiency, supporting revenue and earnings growth.
  
• Potential macroeconomic instability, reliance on opportunistic issuers, and competitive pressures could challenge Moody's revenue growth and meeting financial targets.

Catalysts

Operates as an integrated risk assessment firm worldwide.

• The anticipated growth in private credit markets, expected to reach up to $3 trillion by 2028, suggests significant demand for Moody’s credit ratings and assessments, likely enhancing future revenue and overall earnings.
  
• Expansion in the Sustainable & Transition Finance sector, driven by global commitments to net-zero and clean energy investments projected to rise dramatically, opens the door for increased debt issuance and the need for Moody’s ratings, boosting revenue.
  
• The strategic investment in emerging and domestic debt markets, specifically across high-growth regions like Asia, Africa, and Latin America, should capitalize on elevated economic growth rates, increasing Moody’s future revenue from ratings in these regions.
  
• The integration of RMS into Moodys’ Insurance Solutions with recently improved growth rates and margins reflects ongoing optimization, which could enhance future earnings and operating margins in the insurance sector.
  
• Increasing adoption and integration of AI-driven solutions within Moody’s product suite is expected to enhance cross-sell and upsell opportunities, bolstering future revenue and supporting long-term earnings growth.

Moody's Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Moody's's revenue will grow by 7.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 29.0% today to 30.9% in 3 years time.
• Analysts expect earnings to reach $2.7 billion (and earnings per share of $15.05) by about November 2027, up from $2.0 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.3x on those 2027 earnings, down from 43.4x today. This future PE is greater than the current PE for the US Capital Markets industry at 24.2x.
• Analysts expect the number of shares outstanding to decline by 0.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.92%, as per the Simply Wall St company report.

Moody's Future Earnings Per Share Growth

Risks

• The potential for macroeconomic instability or exogenous shocks, such as geopolitical events or changes in the macroeconomic environment, could lead to uncertainty and volatility, impacting issuance growth and revenue generation.
  
• High levels of issuance already achieved in the fiscal year could lead to difficult comparisons in future periods, possibly dampening expectations for revenue growth as high issuance performance may not be sustainable.
  
• The reliance on opportunistic issuers and infrequent issuers for revenue growth creates a risk due to their inconsistent market activity, potentially affecting the impact on Moody's revenue from ratings.
  
• Continued competition and attrition in areas such as asset management and banking, particularly linked to macroeconomic stress, could affect recurring revenue and net margins in MA.
  
• The revenue growth from private credit is still developing, with uncertainties around its scale and timing in contributing significantly to overall revenue, thus posing risk to meeting future financial targets.

Valuation

• The analysts have a consensus price target of $497.06 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 $570.0, and the most bearish reporting a price target of just $415.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.6 billion, earnings will come to $2.7 billion, and it would be trading on a PE ratio of 40.3x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $479.42, the analyst's price target of $497.06 is 3.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.