Moody's Corp

Moody's earns high returns on little capital, but at this price the shares sit above our base-case value.

Moody's Corporation runs two parts: Moody's Analytics, which sells data and software subscriptions, and Moody's Investors Service, which earns fees from rating debt issuers. Across 15 years of filings it has never reported a loss, and its return on invested capital averaged 29%. Owner earnings reached $2.7B in the latest year, and the business needs little capital to grow. The valuation is the weak point: at $485.07 the shares sit above our base-case value of $345.72, and the owner earnings yield is 2.7%.

Moody's runs two segments. Moody's Analytics (MA) sells data, research and cloud software subscriptions to banks, insurers, corporates and governments, which helps them check counterparties and manage risk. Moody's Investors Service (MIS) earns credit rating fees, mostly from the issuers of debt, so its revenue rises and falls with how much debt is sold. We see the subscription side as the more repeatable part of the business and the rating side as the more cyclical part.

• Rating fees tied to debt issuance volumes at MIS
• Recurring subscriptions for data, analytics and KYC tools at MA
• Annual monitoring and program fees that add stability to MIS
• Price increases and cross-selling into existing customers
• Cost discipline that lifts operating margin, now 43%

Inside the circle? The subscription and data business has grown steadily, and the operating margin has held in a high range across 15 years of filings. The rating side depends on debt issuance and faces regulatory change, litigation and AI-driven change in how risk is assessed, so we cannot be confident about its shape ten years out. Because the excerpts give no forward cost or market-share data, we would rate this medium rather than high.

The filing points to three protections: proprietary data built into customer workflows, cloud subscriptions that banks and insurers use for compliance, and MIS registration as an NRSRO. Return on invested capital averaged 29% and never fell below 18%, while operating margin averaged 39%, which suggests the protection has so far held up in the years we can see. The ratings side is the weaker part, because the filing says most MIS revenue comes from rating fees tied to debt issuance, and the operating margin fell in 2022 before recovering. We would call the moat narrow: the excerpts cover only 15 years, give no retention or market-share data, and describe regulation and AI change that could reset pricing. The headline 345% says little here, because equity was zero or negative in several years.

Moody's spends its cash on the business itself, on acquisitions and on returns to owners. The share count has changed by -0.9% a year on average, so repurchases have been shrinking the number of shares outstanding. Retained earnings pass the test at 6.3× of market value for each one dollar kept, and the dividend has taken about 36% of profit on average. The weak point is price: at $485.07 the shares sit above our base value of $345.72, so buybacks at this level would not meet Buffett's test of buying below intrinsic value, and the excerpts do not show the prices paid. The filing's own language is promotional, although the MD&A plainly explains one-off tax items.

• The share count has changed by -0.9% a year on average, so buybacks have reduced the number of shares owners hold.
• Dividends have taken about 36% of profit on average, which leaves room for reinvestment. Retained earnings pass our test at 6.3×.
• Total debt is $7.0B and interest cover is 14×. The debt figure in the filing excerpt does not match this token, and we have not reconciled the two.
• At $485.07, the price sits -40% against the base value of $345.72. Buybacks made at that level would sit against the principle of repurchasing only below intrinsic value, but we cannot confirm the prices paid from these excerpts.

• FailsDemonstrated, consistent earning powerFails

  No loss years across 15 years of filings, with operating margin varying by 8.2% around its average.

  Why this test
• FailsMargin of safetyFails

  At $485.07, the price is above the base-case value of $345.72 (the bear case is $185.86), so there is no margin of safety (-40%). The standard lens asks for 25%.

The engine finds that the business passes several of Buffett's tests: return on capital, owner earnings, low capital intensity, little debt on an interest cover basis, and the $1 retained test. It fails two tests that bear most directly on price. The first is the margin of safety: the price of $485.07 is above the base value of $345.72, and the bear value of $185.86 is lower still. The second is the rates test. Buffett's view that interest rates act like gravity means a higher rate lowers what future cash is worth today, and an owner earnings yield of 2.7% sits below the 5.1% ten-year Treasury yield. The engine also marks consistent earning power as a fail. Its stated reason is that operating margin moved by 8.2% around its average, so the earnings do not look as steady as Buffett's acquisition criteria ask. The return on equity figure of 345% should be read with care, because equity was zero or negative in several years. The filing says that "strong investor demand and tight credit spreads supported revenue growth in all ratings LOBs" [0001628280-26-009136:mdna:23]. That is a cyclical tailwind, and a Buffett-style investor would test it against a longer record before trusting it.

• Rated debt issuance and credit spread movements in the MIS segment

  The filing says most MIS revenue comes from rating fees tied to debt issuance, so a fall in issuance would test the margin.

• Operating margin compared with its 2022 low

  The ten-year history shows the margin fell in 2022, which tests whether the current high is a floor or a peak.

• Share repurchase prices and the share count

  Buybacks only help owners below intrinsic value, and the excerpts do not show the prices paid.

• Regulatory and litigation developments for private credit ratings and ESG ratings

  The risk factors describe new rules and investigations that could reduce prices or volumes.

• Revenue and costs from Gen AI and agentic AI products in MA

  The filing presents AI as both a growth opportunity and a source of new legal and operational risk.

Questions the filings couldn't answer

• How much MIS revenue recurs through annual monitoring fees, and how much would fall if issuance dropped for several years?
• What prices did management pay for its own shares, and did it judge them to be below intrinsic value?
• The excerpts give no customer retention or market share data for Moody's Analytics, so how durable that subscription revenue is remains unclear.