What Is Moody’s Fair Value?
In August 2017, Moody’s (NYSE:MCO) completed the acquisition of Bureau Van Djik – an aggregator and distributor of private company datasets. This is the company’s largest acquisition in its history (around $ 4 billion) and is likely to give a huge boost to its revenues and profitability. A strong economic environment with high volumes of debt issuances and international expansion (especially in China with the economy opening up to foreign raters) is also providing a boost to Moody’s business, which is likely to continue for the next two years.
In this note, we delve into our valuation estimate for the company and provide an overview of our key forecasts and estimates for the company. This can be seen in more detail in our interactive dashboard on estimating the valuation of Moody’s. You can change the key value drivers to arrive at your own estimate for the company’s valuation.
As a first step, we estimate the company’s revenues over the next two years. For details on Moody’s Corporation’s revenue growth and key revenue drivers, please refer to our dashboard An Overview Of Moody’s Corporation’s Revenue Growth.
The next step is to forecast the EBITDA margin and calculate the company’s EBITDA for 2019. Moody’s operates two broad divisions – Moody’s Investor Services and Moody’s Analytics. The EBITDA (earnings before interest, tax, depreciation and amortization) margin of both these division has been in the range of 53-57% and 23-25%, respectively, between 2015-2017. For the first half of 2018, the margins for these divisions were around 59% and 25%, respectively. We expect the margins to remain in the range of their 2017 levels, leading to an overall EBITDA margin of around 45% for the company. Moody’s closest competitor, S&P Global, also operates at an EBITDA margin of around 46%.
Once the EBITDA estimate is calculated, we make other adjustments to arrive at the company’s net income forecast. From 2018, Moody’s Corporation will benefit from the changes in U.S. tax laws, bringing down its effective tax rate to around 25%, leading to higher net income.
The final two steps are to calculate the earnings per share (EPS) and a PE (price to earnings) multiple to arrive at a valuation estimate. The company’s total outstanding shares have remained fairly flat in the past two years, and we expect this to continue in the future. Moody’s had a trailing PE ratio of 28 in 2017 and we expect the company to command a similar multiple going forward, as its growth prospects remain strong. S&P Global commands a PE multiple of 29X based on its EPS for 2017.
Based on these estimates, we estimate that Moody’s fair value could be as as high as $235, which is well ahead of its current market price of around $175.
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