Shareholders Should Be Pleased With Moody's Corporation's (NYSE:MCO) Price

When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider Moody's Corporation (NYSE:MCO) as a stock to avoid entirely with its 44.7x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

With its earnings growth in positive territory compared to the declining earnings of most other companies, Moody's has been doing quite well of late. The P/E is probably high because investors think the company will continue to navigate the broader market headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for Moody's

Keen to find out how analysts think Moody's' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Growth For Moody's?

There's an inherent assumption that a company should far outperform the market for P/E ratios like Moody's' to be considered reasonable.

If we review the last year of earnings growth, the company posted a terrific increase of 17%. Still, incredibly EPS has fallen 7.1% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

Turning to the outlook, the next three years should generate growth of 15% per year as estimated by the analysts watching the company. Meanwhile, the rest of the market is forecast to only expand by 10% per annum, which is noticeably less attractive.

In light of this, it's understandable that Moody's' P/E sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Moody's' analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E. At this stage investors feel the potential for a deterioration in earnings isn't great enough to justify a lower P/E ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

You always need to take note of risks, for example - Moody's has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Moody's, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.