MCO Moody's Corporation
A top-tier duopoly franchise, but at about 28x earnings it prices in years of flawless compounding.
The story
Moody's is half of a global credit-ratings duopoly with S&P. It has regulatory entrenchment, issuer-pay pricing power and very high incremental margins. It also has a faster-growing Analytics arm (data, KYC, risk software) that makes revenue more recurring. It is a mature franchise that still compounds high single digits: ratings volumes follow debt-issuance cycles, and Analytics adds steady subscription growth on a light-capital base.
I set margin at 48%, near the current 47% TTM, reflecting ratings operating leverage while Analytics dilutes the mix a little. The reported sales-to-capital of 0.74 is inflated by acquisition goodwill (Bureau van Dijk and others); organic reinvestment is small (capex is below D&A), so I use 2.0 for incremental capital. I use a 12-year horizon because the duopoly moat is exceptionally durable, and growth fades from 8.5% to a 3.5% terminal rate, below the 5.24% risk-free rate.
Value drivers
| Revenue growth (Y1) | 8.5% |
| Terminal growth | 3.5% |
| Forecast horizon | 12y |
| Target operating margin | 48.0% |
| Years to target margin | 4 |
| Sales-to-capital | 2.00 |
| Beta | 1.05 |
| Failure probability | 1.0% |
| Cost of capital (WACC) | 9.6% |
| Terminal WACC | 9.4% |
Valuation bridge
| PV of explicit FCFF | 29.06B |
| PV of terminal value | 28.05B |
| Equity value | 51.83B |
| ÷ shares → per share | $299.26 |
Projected free cash flow to the firm
| Yr | Revenue | Growth | Margin | NOPAT | Reinvest | FCFF | PV |
|---|---|---|---|---|---|---|---|
| 1 | 8.85B | 8.5% | 47.5% | 3.31B | 346.80M | 2.96B | 2.70B |
| 2 | 9.57B | 8.0% | 47.7% | 3.59B | 356.16M | 3.23B | 2.69B |
| 3 | 10.29B | 7.6% | 47.8% | 3.87B | 363.07M | 3.51B | 2.67B |
| 4 | 11.03B | 7.1% | 48.0% | 4.16B | 367.24M | 3.80B | 2.63B |
| 5 | 11.76B | 6.7% | 48.0% | 4.44B | 368.39M | 4.07B | 2.58B |
| 6 | 12.50B | 6.2% | 48.0% | 4.72B | 366.27M | 4.35B | 2.51B |
| 7 | 13.22B | 5.8% | 48.0% | 4.99B | 360.68M | 4.63B | 2.44B |
| 8 | 13.92B | 5.3% | 48.0% | 5.26B | 351.46M | 4.90B | 2.36B |
| 9 | 14.60B | 4.9% | 48.0% | 5.51B | 338.51M | 5.17B | 2.27B |
| 10 | 15.24B | 4.4% | 48.0% | 5.75B | 321.80M | 5.43B | 2.17B |
| 11 | 15.84B | 4.0% | 48.0% | 5.98B | 301.35M | 5.68B | 2.07B |
| 12 | 16.40B | 3.5% | 48.0% | 6.19B | 277.26M | 5.91B | 1.97B |
Key risks
- Debt issuance slows as rates rise or credit spreads widen, cutting transaction-driven ratings revenue
- Regulatory or legal action on issuer-pay conflicts, or pricing scrutiny
- AI-native or cheaper data and risk competitors slow Analytics growth and compress its margins
Catalysts
- Refinancing wall of 2020-21 era debt and falling policy rates drive an issuance upcycle
- Analytics ARR growth and margin expansion from GenAI-enabled products