As part of a new series, each week we typically conduct a DCF on one of the companies in our screens. This week we thought we’d take a look at one of the stocks that is not currently in our screens, Moody’s Corporation (MCO).
 

Profile

Moody’s Corporation operates as an integrated risk assessment firm worldwide. It operates in two segments, Moody’s Analytics and Moody’s Investors Services. The Moody’s Analytics segment develops a range of products and services that support the risk management activities of institutional participants in financial markets. It also offers credit research, credit models and analytics, economics data and models, structured finance solutions; data sets on companies and securities; and SaaS solutions supporting banking, insurance, and know your customer workflows. The Moody’s Investors Service segment publishes credit ratings and provides assessment services on various debt obligations, programs and facilities, and entities that issue such obligations, such as various corporate, financial institution, and governmental obligations, as well as structured finance securities. The company was formerly known as Dun and Bradstreet Company and changed its name to Moody’s Corporation in September 2000. Moody’s Corporation was founded in 1900 and is headquartered in New York, New York.
 

Recent Performance

Over the past twelve months the share price is up 25.66%.

Source: Google Finance

Inputs

• Discount Rate: 10%
• Terminal Growth Rate: 2%
• WACC: 10%

Forecasted Free Cash Flows (FCFs)

Terminal Value

Terminal Value = FCF * (1 + g) / (r – g) = 30.98 billion

Present Value of Terminal Value

PV of Terminal Value = Terminal Value / (1 + WACC)^5 = 19.24 billion

Present Value of Free Cash Flows

Present Value of FCFs = ∑ (FCF / (1 + r)^n) = 8.16 billion

Enterprise Value

Enterprise Value = Present Value of FCFs + Present Value of Terminal Value = 27.40 billion

Net Debt

Net Debt = Total Debt – Total Cash = 4.71 billion

Equity Value

Equity Value = Enterprise Value – Net Debt = 22.69 billion

Per-Share DCF Value

Per-Share DCF Value = Enterprise Value / Number of Shares Outstanding = $123.31
 

Conclusion

Based on the DCF valuation, the stock is overvalued. The DCF value of $123.31 per share is lower than the current market price of $472.1. The Margin of Safety is -282.86%.

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