When I completed my 2025 Mid-Year Portfolio Review I held 410 Moody’s (MCO) shares in a ‘Core’ account in the FFJ Portfolio and it was my 18th largest holding; the share price was $453.12.
At the time of my 2025 Year-End Investment Holdings Review I still held 410 shares and it was my 21st largest holding; the share price was $510.85.
Much like S&P Global (SPGI) which I reviewed in this February 11, 2026 post, MCO has recently fallen out of favor. The share price has plunged from a 52 week high of $546.88 reached in mid-January 2026 to ~$412 on February 11 before recovering to $463.37 at the February 25, 2026 market close.
Given the improvement in MCO’s valuation I opportunistically acquired:
- 100 shares @ $463.88128 on February 4, 2026 in the same ‘Core’ account; and
- 40 shares @ $412.63 on February 11, 2026 in the same account.
My MCO exposure is now 550 shares.
I last reviewed Moody’s (MCO) in this October 24, 2025 post at which time the most current financial information was for Q3 and YTD2025. With the release of Q4 and FY2025 results on February 18, 2026 I revisit this existing holding before leaving for my ski trip.
Business Overview
Details of MCO’s operations are found in Part 1 Item 1 in the FY2025 Form 10-K (SEC Filings section of the company’s website).
Financials
Q4 and FY2025 Results
Material pertaining to MCO’s Q4 and FY2025 results is accessible here. In addition, I recommend reviewing MCO’s FY2025 Form 10-K for which a link is provided above.
The following is a very high level overview of MCO’s FY2025 results.
Conventional And Modified Free Cash Flow (FCF) Calculations (FY2019 – FY2025)
Since FCF is a non-GAAP measure, there is no consistency in its calculation. In several previous posts I explain my rationale for deducting stock-based compensation (SBC) to determine a company’s FCF. I, therefore, provide calculations using the:
- conventional method where only CAPEX is deducted from OCF; and
- more conservative modified method where I also deduct SBC.
Capital Allocation
The following reflects MCO’s capital allocation in FY2024 and FY2025 and the FY2026 forecast. MCO does not deduct SBC when calculating FCF.
I provide the following from MCO’s Q3 2025 earnings presentation so we have data for one extra fiscal year (FY2023).
The following reflects MCO’s FY2024 and FY2025 investment for growth and capital return to shareholders as well as the FY2026 forecast.
I provide the following from MCO’s Q3 2025 earnings presentation so we have data for one extra fiscal year (FY2023).
The following reflects MCO’s capital allocation priorities.
ROIC and WACC
Return on Invested Capital (ROIC) provides an indication of a company’s efficiency. In essence, is a company actually creating value or ‘burning’ cash for the sake of growth?
A company with a higher ROIC is mathematically worth more because it requires less reinvestment to achieve that growth.
A good indication of how well a company is performing is to compare ROIC to the Weighted Average Cost of Capital (WACC). WACC, however, is not a metric officially reported by MCO but it can be roughly estimated based on the company’s credit profile and market conditions.
The generally accepted high-level formula used by Wall Street is:
ROIC = NOPAT/Average Invested Capital
with the Net Operating Profit After Tax (NOPAT) formula being Operating Income (EBIT) x (1-tax rate)
This shows how much profit the core business makes while ignoring how much debt the company has.
The Average Invested Capital is the total money tied up in the business.
- The Operating Approach formula is
- The Financing Approach is
One shortcoming with ROIC is that it is a non-GAAP metric meaning the input data plugged into the ROIC formula is inconsistent.
MCO consistently maintains a positive ROIC spread, meaning it generates returns significantly higher than its cost of capital. The 2019 – 2025 time frame, however, has been marked by significant volatility in capital markets thus directly impacting MCO.
A freeze in debt issuance following aggressive interest rate hikes led to a plunge in MCO’s economic spread in 2022. In FY2024 and FY2025, however, MCO experienced a recovery. This resurgence was driven by companies needing to refinance existing debt, which boosted MCO’s ROIC above 20%.
MCO’s FY2025 ROIC has stabilized near its historical mean as the Moody’s Analytics (MA) segment continues its streak of over 68 consecutive quarters of expansion, providing a high-margin recurring revenue hedge against the more cyclical ratings business.
FY2026 Guidance
The following reflects MCO’s FY2026 guidance.
MCO’s FY2026 CAPEX will increase by ~$0.1B from ~$0.326B in FY2025. This increase is primarily for the build-out of new headquarters in New York and London.
On the Q4 2025 earnings call, management provided an upbeat forecast for the coming year, signaling that they expect the ‘refinancing wall’ and AI investments to continue fueling growth. The expectation is that 2026 issuance will be front-loaded with ~55% of the year’s total issuance occurring in the first half of the year.
In response to analysts questioning how AI engagement is translating into actual revenue, management responded that while AI is currently ‘deepening share of wallet’ with large strategic clients, they expect broader monetization as modular ‘AI agents’ are rolled out.
Some in the investment community have concerns about AI firms replicating MCO’s business. On the earnings call, management emphasized that regulated institutions require ‘trusted, decision-grade data’ that AI startups lack.
Despite the near-term dynamics, MCO remains confident about the demand for its solutions. The deep currents that underpin the demand for its solutions are the:
- evolution of capital markets including private credit;
- digital transformation and automation in financial services industries;
- need to know more about with whom you are conducting business;
- financial impact of extreme weather events; and
- transformative power of generative AI and the tremendous opportunities available from proprietary data.
Risk Assessment
There is no change to MCO’s senior unsecured domestic long-term debt ratings and outlook.
- S&P Global – A- with a stable outlook upgraded from BBB+ on December 23, 2025; and
- Fitch – BBB+ with a stable outlook (last reviewed and affirmed on February 12, 2026)
S&P Global’s rating is one tier higher than that accorded by Fitch.
S&P Global’s rating is the bottom tier of the upper medium grade investment grade category. This rating defines MCO as having a strong capacity to meet its financial commitments. It is, however, somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in higher-rated categories.
Fitch’s rating is the top tier of the lower medium grade investment grade category. It defines MCO as having an adequate capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitments.
The following schedule of total indebtedness is found on page 112 of 212 in the FY2025 Form 10-K.
The rating assigned to each indebtedness is accessible here. As I compose this post on February 25, this page has not yet been updated to reflect the December 23, 2025 upgrade by S&P Global.
MCO’s credit risk is acceptable from my perspective.
Dividend and Dividend Yield
Dividend distributions are MCO’s 3rd capital allocation priority.
On February 10, 2026, MCO’s Board declared a regular quarterly dividend of $1.03/share payable on March 13, 2026, to stockholders of record at the close of business on March 2, 2026. The prior quarterly dividend was $0.94.
MCO’s dividend history reflects annual dividend increases starting in 2011 following a dividend freeze that was precipitated by challenging business conditions during The Financial Crisis.
MCO is a ‘growth’ stock. The unappealing dividend metrics, therefore, may dissuade some investors from investing in the company. Investors, however, should focus on an investment’s total potential return.
MCO’s diluted weighted average number of shares outstanding during FY2019 – FY2025 (in millions of shares) are reflected in the table provided in the Conventional And Modified Free Cash Flow (FCF) Calculations (FY2019 – FY2025) section of this post.
On October 21, 2025, MCO’s Board authorized $4.0B in share repurchase authority. There is no established expiration date for the remaining authorization.
As of December 31, 2025, MCO had 177.5 million shares outstanding, with ~$4B of share repurchase authority remaining.
The following reflects MCO’s quarterly share repurchases throughout FY2025.
Valuation
On February 25, 2026, MCO’s share price closed at $463.37. Using management’s FY2026 $15.00 – $15.60 diluted EPS outlook, the forward diluted PE range is ~29.7 – ~30.9. The FY2026 adjusted diluted EPS outlook is $16.40 – $17.00 giving us a ~27.3 – ~28.3 forward adjusted diluted PE range.
The forward valuations using the currently available adjusted diluted broker estimates are:
- FY2026 – 24 brokers – mean of $16.67 and low/high of $16.03 – $16.92. Using the mean estimate, the forward adjusted diluted PE is ~27.8.
- FY2027 – 23 brokers – mean of $18.68 and low/high of $17.94 – $19.65. Using the mean estimate, the forward adjusted diluted PE is ~24.8.
- FY2028 – 11 brokers – mean of $20.52 and low/high of $19.09 – $22.29. Using the mean estimate, the forward adjusted diluted PE is ~22.6.
Management’s FY2026 FCF guidance is ~$2.8B – ~$3.0B. Using the ~$2.9B mid-point and my FY2026 ~$0.255B SBC estimate, the modified FCF is $2.645B.
The diluted weighted average number of outstanding shares in FY2025 was 179.9 million. MCO’s FY2026 forecast calls for share repurchases totaling at least ~$2B. If it repurchases shares at an average purchase price of ~$500, this amounts to 4 million shares. The timing of the purchases, the average purchase price, and the number of shares issued as part of MCO’s various employee compensation programs will impact the weighted average diluted shares outstanding.
I prefer to err on the side of caution and estimate the weighted average diluted shares outstanding will only drop by 2 million shares. This is reasonably consistent with the reduction in the diluted weighted average shares outstanding over the past few years.
Using the ~$2.9B mid-point of management’s FY2026 FCF guidance and 177 million shares, I anticipate MCO will generate ~$16.38 of FCF/share. Divide the current ~$463.37 share price by ~$16.38 and the P/FCF estimate is ~28.3.
If we deduct ~$0.255B of SBC from $2.9B, we get ~$2.645B of modified FCF and 177 million shares giving us ~$14.94 of FCF/share. Divide the current ~$463.37 share price by ~$14.94 and the P/FCF estimate is ~31.
In my October 24, 2025 post I wrote:
MCOs’ share price at the October 23 market close is ~$479.30. Using management’s FY2025 $13.15 – $13.40 diluted EPS outlook, the forward diluted PE range is ~35.8 – ~36.4. The FY2025 adjusted diluted EPS outlook is $14.50 – $14.75 giving us a ~32.5 – ~33.1 forward adjusted diluted PE range.
The forward valuations using the currently available adjusted diluted broker estimates are:
- FY2025 – 24 brokers – mean of $14.42 and low/high of $13.54 – $14.91. Using the mean estimate, the forward adjusted diluted PE is ~33.2.
- FY2026 – 24 brokers – mean of $16.10 and low/high of $14.95 – $17.05. Using the mean estimate, the forward adjusted diluted PE is ~29.8.
- FY2027 – 21 brokers – mean of $18.02 and low/high of $16.06 – $19.81. Using the mean estimate, the forward adjusted diluted PE is ~26.6.
Management’s FY2025 FCF guidance is ~$2.5B. If we estimate $0.25B of SBC in FY2025, we get a modified FCF $2.25B.
The diluted weighted average number of outstanding shares in Q3 2025 was 179.6 million and 180.2 for the year. MCO’s FY2025 forecast calls for share repurchases totaling at least ~$1.5B and it has already repurchased ~$1.17B in the first 3 quarters. We can, therefore, expect at least another $0.33B to be repurchased in Q4. If it repurchases $0.33B of shares in Q4 at an average price of $480, this amounts to ~687,500 shares. It will likely also issue shares to its employees in Q4 so I estimate MCO’s FY2025 diluted weighted average number of shares outstanding will be ~179 million shares.
Using management’s ~$2.5B FCF guidance and 179 million shares, I anticipate MCO will generate ~$14 of FCF/share. Divide the current ~$479.30 share price by ~$14 and the P/FCF estimate is ~34.2.
If we deduct ~$0.25B of SBC from $2.5B, we get ~$2.25B of modified FCF and 179 million shares giving us ~$12.6 of FCF/share. Divide the current ~$479.30 share price by ~$12.6 and the P/FCF estimate is ~38.
For ease of comparison, I provide my assessment of MCO’s valuation at the time of my April 27, 2025 post.
MCO’s April 25, 2025 closing share price was $438.62. Using management’s FY2025 diluted EPS estimate of $12.00 – $12.75, the forward diluted PE range is ~34.4 – ~36.5.
Management’s FY2025 adjusted diluted EPS estimate is $13.25 – $14.00 giving us a forward adjusted diluted PE range of ~31.3 – ~33.1.
The forward valuations using the currently available adjusted diluted broker estimates are:
- FY2025 – 22 brokers – mean of $13.71 and low/high of $13.27 – $14.26. Using the mean estimate, the forward adjusted diluted PE is ~32.
- FY2026 – 22 brokers – mean of $15.43 and low/high of $14.85 – $16.08. Using the mean estimate, the forward adjusted diluted PE is ~28.4.
- FY2027 – 11 brokers – mean of $17.43 and low/high of $16.06 – $18.85. Using the mean estimate, the forward adjusted diluted PE is ~25.2.
Management’s FY2025 FCF guidance is $2.3B – $2.5B. If we estimate $0.25B of SBC in FY2025, we get a modified FCF range of $2.05B – $2.25B.
The diluted weighted average number of outstanding shares in Q1 2025 was 180.7 million. MCO’s FY2025 forecast calls for share repurchases totaling ~$1.3B. It has already repurchased ~$0.373B in Q1 so another ~$0.927B is likely to be repurchased in Q2 – Q4. If MCO repurchases shares at an average price of $460, it will repurchase just over 2 million shares. On this basis, I estimate MCO’s FY2025 diluted weighted average number of shares outstanding will be ~179 million shares.
Using the $2.4B mid-point of management’s FCF guidance and 179 million shares, I anticipate MCO will generate ~$13.40 of FCF/share. Divide the current ~$438.62 share price by ~$13.40 and my P/FCF estimate is ~32.7.
Using the $2.15B mid-point of the modified FCF range and 179 million shares, I anticipate MCO will generate ~$12 of FCF/share. Divide the current ~$438.62 share price by ~$12 and my P/FCF estimate is ~36.6.
Final Thoughts
In my prior post I wrote:
Increases in MCO’s FY2025 guidance and a cautiously optimistic FY2026 outlook is leading me to increase my fair value estimate from the ~$450 level I expressed in my April post to ~$530 – ~$540. With shares currently trading at ~$479.30, MCO’s share price would increase ~11.6% to reach the mid-point of my fair value estimate.
I am currently in no rush to increase my exposure. Should MCO’s share price experience weakness, however, I hope to be in a position to acquire additional shares.
I continue to view ~$530 – ~$540 as a fair price and consider shares to be undervalued despite the $51.37 ($463.37 – $412) share price surge relative to my February 11 purchase price.
I wish you much success on your journey to financial freedom!
Note: Thanks for reading this article. Please send any feedback, corrections, or questions to finfreejourney@gmail.com.
Disclosure: I am long MCO.
Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decisions without conducting your research and due diligence. You should also consult your financial advisor about your specific situation.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.
