Company Reports

Moody’s reported a very good start to 2024 with first-quarter revenue growing 21% and rating revenue growing 35%. EBITDA margins also showed strong expansion with firmwide EBITDA margins expanding to 50.7% from 44.6% and ratings EBITDA margins expanding to 64.6% from 56.8%. However, similar to S&P Global, Moody’s believes there is significant pull-forward bond issuance, that is issuance occurring in the first quarter rather than later in the year. As a result, Moody’s did not adjust its full-year outlook much. As we tweak our model, we expect to raise our fair value estimate of $345 by a single-digit percentage to reflect slightly stronger bond issuance than our previous model.

Along with S&P Ratings, Moody’s is a market leader in providing credit ratings on fixed-income securities. Given the embedded nature of credit ratings among capital markets participants, regulators, and index providers, Moody’s enjoys a strong competitive position and strong operating margin.

Moody's reported an OK finish to 2023. Reported revenues grew 15% to $1.48 billion against easy comparisons in ratings, and this was in line with the FactSet consensus expectation. Adjusted EBITDA of $631 million was $40 million below consensus and as a result adjusted EPS of $2.19 missed consensus of $2.33, which we attribute to some margin softness in the ratings business as well as revenue mix toward lower-margin Moody's Analytics. As is customary, Moody's gave its initial 2024 outlook on its fourth-quarter release. Moody's 2024 revenue outlook is roughly in line, but margins and earnings came in disappointing. Overall, Moody's results and outlook were not horrible in our view; we attribute the negative market reaction to Moody's health valuation (about 36 times forward earnings before they reported) leaving little room for error. As we update our model, we will maintain our wide moat rating and fair value estimate of $335. Even with the stock down 7%, we don't view the risk-reward profile of Moody's as compelling at this stage.

Along with S&P Ratings, Moody’s is a market leader in providing credit ratings on fixed-income securities. Given the embedded nature of credit ratings among capital markets participants, regulators, and index providers, Moody’s enjoys a strong competitive position and strong operating margin.

S&P Ratings typically updates its regulatory pricing disclosures in January, and our perusal of its disclosures shows continued healthy pricing power that we believe reflects the ratings segment's network effect and resulting Morningstar wide moat rating. S&P raised its list price 2.6% year over year on corporate bond ratings to 7.90 basis points from 7.70 basis points last year. While this year’s increase was smaller than the 3.4% increase seen in 2023, we note that it is consistent with the 2.6% per year increase since 2019, when the rack rate was 6.95 basis points. In addition, S&P Global also increased the minimum fee on most corporate transactions to $140,000 versus $125,000 in 2023.

Along with S&P Ratings, Moody’s is a market leader in providing credit ratings on fixed-income securities. Given the embedded nature of credit ratings among capital markets participants, regulators, and index providers, Moody’s enjoys a strong competitive position and strong operating margin.

Moody’s reported a decent third quarter. Revenue of $1.47 billion was a touch higher than the FactSet consensus estimate of $1.46 billion while adjusted EBITDA of $657 million came in below the consensus estimate of $676 million. We attribute this and the positive market reaction to strong results in the firm’s lower margin but heavily subscription-based analytics segment. Constant currency Moody’s Analytics revenue grew 11% in the quarter, an uptick from 10% in the second quarter. We will maintain our wide moat rating and $325 fair value estimate on Moody’s shares. We regard shares as being roughly fairly valued.

Along with S&P Ratings, Moody’s is a market leader in providing credit ratings on fixed income securities. Given the embedded nature of credit ratings among capital markets participants, regulators, and index providers, Moody’s enjoys a strong competitive position and strong operating margin.

Amid improving bond issuance, wide-moat Moody’s posted a decent second quarter. Revenue of $1.49 billion and adjusted EPS of $2.30 topped FactSet consensus estimates by 3% and 2%, respectively. We attribute the beat to better ratings revenue. As we increase our near-term ratings revenue projections, we are modestly increasing our fair value estimate on Moody’s shares to $325 from $315.

Along with S&P Ratings, Moody’s is a market leader in providing credit ratings on fixed income securities. Given the embedded nature of credit ratings among capital markets participants, regulators, and index providers, Moody’s enjoys a strong competitive position and strong operating margin.

Earlier this week, the European Commission issued a proposal for the regulation of environmental, social, and governance ratings providers that provide ESG opinions or ESG scores. We believe increased regulation will result in higher costs for ESG ratings providers but will also benefit large incumbent providers with more resources. By far, the company within our coverage universe with the largest exposure to ESG revenue is MSCI. ESG and climate revenue (including both data subscriptions and index) make up about 19% of the firm’s revenue and we estimate about 15% of the firm’s adjusted EBITDA. We keep our respective fair value estimates of $412, $370, and $315 on wide moat-rated MSCI, S&P Global, and Moody’s.

Though revenue declined 3% in the first quarter, wide-moat-rated Moody’s reported a better-than-expected start to 2023. Revenue of $1.47 billion, adjusted EBITDA of $656 million, and $2.72 of EPS beat the FactSet consensus estimates of $1.43 billion, $616 million, and $2.22, respectively. While the firm’s operating results beat expectations, we attribute the bulk of the earnings beat to an unusually low tax rate, something we don’t expect to reoccur. Overall, there was little that would alter our long-term view of Moody’s, and we are maintaining our fair value estimate of $315. We regard shares as approximately fairly valued.

Along with S&P Ratings, Moody’s is a market leader in providing credit ratings on fixed income securities. Given the embedded nature of credit ratings among capital markets participants, regulators, and index providers, Moody’s enjoys a strong competitive position and strong operating margin.

As expected, revenue declined meaningfully for wide-moat Moody’s amid soft bond issuance impacting the ratings business. Organic constant currency revenue declined 13% to $1.29 billion as ratings revenue declined 32%. Moody’s Analytics acted as a partial buffer to the vicissitudes of the ratings business with steady revenue growth and operating margin expansion. As we tweak our model, we are increasing our fair value estimate to $315 from $290 to reflect a bond issuance rebound, solid results at Moody’s Analytics, and time value of money.

Along with S&P Ratings, Moody’s is a market leader in providing credit ratings on fixed income securities. Given the embedded nature of credit ratings among capital markets participants, regulators, and index providers, Moody’s enjoys a strong competitive position and strong operating margin.

Amid rising interest rates, quantitative tightening by the Federal Reserve, and increased economic uncertainty, the credit market has been very soft. Against this backdrop, Moody’s revenue declined by 16%, with a 36% decline in ratings revenue and a 53% decline in transaction-based revenue. As we lower our near- and medium-term ratings revenue forecast, we are reducing our fair value estimate on wide-moat-rated Moody’s to $290 from $310 per share. We are taking a cautious view as we expect interest rates to continue to increase and bond market volatility to continue.

Along with S&P Ratings, Moody’s is a market leader in providing credit ratings on fixed income securities. Given the embedded nature of credit ratings among capital markets participants, regulators, and index providers, Moody’s enjoys a strong competitive position and strong operating margin.

Along with S&P Ratings, Moody’s is a market leader in providing credit ratings on fixed income securities. Given the embedded nature of credit ratings among capital markets participants, regulators, and index providers, Moody’s enjoys a strong competitive position and strong operating margin.

Wide-moat Moody’s reported a soft quarter with revenue declining 11% as the bond issuance market has substantially weakened. With much of Moody’s revenue (45% in 2021) coming from outside the United States, a stronger dollar will weigh on revenue although this will be partially offset as nondollar expenses serve as a partial hedge. As we update our model, we expect to reduce our fair value estimate by a single-digit-percentage to reflect issuance headwinds.

Along with S&P Ratings, Moody’s is a market leader in providing credit ratings on fixed income securities. Given the embedded nature of credit ratings among capital markets participants, regulators, and index providers, Moody’s enjoys a strong competitive position and strong operating margin.