Is It Too Late to Consider Moody's After Its 85% Three Year Rally?

• Wondering if Moody's is still worth buying after its huge run, or if the easy money has already been made? First, let's frame where the stock sits today before we dive into the numbers.
• The shares have nudged higher recently, up about 3.2% over the last week, 4.9% over the past month, and roughly 6.4% year to date, adding to an impressive 85.0% gain over three years.
• Those moves come against a backdrop of steady demand for credit ratings and analytics as debt markets stay active and financial regulation remains complex. At the same time, investors are watching how Moody's leverages its data and analytics platforms to drive stickier, higher margin revenue in a competitive landscape.
• Despite this backdrop, Moody's currently scores just 0/6 on our valuation checks, which suggests traditional metrics are flashing "fully priced" at best. Next, we will unpack what different valuation approaches actually say about the stock today and hint at an even more insightful way to think about value by the end of this article.

Moody's scores just 0/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Moody's Excess Returns Analysis

The Excess Returns model asks a simple question: how much profit can Moody's reliably earn above the return that shareholders demand, and how long can it sustain that gap? Instead of focusing on near term earnings alone, it looks at the value created on each dollar of equity invested.

For Moody's, the inputs are impressive. Book Value sits at $22.18 per share, and the Stable EPS is estimated at $17.17 per share, based on weighted future Return on Equity forecasts from 7 analysts. With an Average Return on Equity of 62.99% and a Cost of Equity of $2.26 per share, the model calculates an Excess Return of $14.92 per share. Stable Book Value is expected to rise to $27.26 per share, using estimates from 5 analysts.

When these excess returns are projected forward and discounted, the model arrives at an intrinsic value that implies Moody's shares are 54.9% overvalued versus the current price. In other words, the market is paying a steep premium for Moody's ability to keep compounding high returns.

Result: OVERVALUED

Our Excess Returns analysis suggests Moody's may be overvalued by 54.9%. Discover 903 undervalued stocks or create your own screener to find better value opportunities.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Moody's.

Approach 2: Moody's Price vs Earnings

For profitable, mature businesses like Moody's, the price to earnings ratio is often the cleanest snapshot of how much investors are willing to pay today for each dollar of current earnings. It naturally blends expectations about future growth and perceived risk, since faster growing, lower risk companies should usually command higher PE multiples than slower growing or riskier ones.

Right now, Moody's trades on a PE of about 40.0x, a hefty premium to the Capital Markets industry average of roughly 25.1x and above the peer group average of around 31.3x. To move beyond these blunt comparisons, Simply Wall St uses a proprietary Fair Ratio, which estimates what PE multiple a company should trade on after adjusting for its specific earnings growth outlook, profit margins, risk profile, industry, and market cap. This makes it more tailored than simply lining Moody's up against peers that may have very different business models or risk levels.

For Moody's, the Fair Ratio is estimated at 17.7x, well below the current 40.0x, which indicates the shares are trading at a significant premium to what fundamentals alone would justify.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1459 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Moody's Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let's introduce you to Narratives, a simple way to attach your story about Moody's to the numbers by linking what you believe about its future revenue, earnings and margins to a financial forecast and then to a Fair Value estimate. On Simply Wall St's Community page, millions of investors use Narratives as an easy, accessible tool to spell out their assumptions, see the resulting Fair Value, and then compare it directly with the current share price to assess whether Moody's looks like a buy, hold or sell, with those Fair Values updating dynamically whenever new information such as earnings or major news reaches the market. For example, one optimistic Narrative on Moody's might emphasize rapid private credit growth, AI enabled analytics and margin expansion to support a Fair Value closer to the top analyst target of about $595.0. In contrast, a more cautious Narrative could focus on regulatory risk, competitive pressure and business model disruption to place a Fair Value nearer the low end around $475.0. This illustrates how different perspectives can lead to different, but clearly quantified, investment decisions.

Do you think there's more to the story for Moody's? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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