This Ratings King Just Had Record Year

Moody's Corporation (MCO) | FY2025 Earnings Analysis

There is something beautifully ironic about Moody's Corporation. This is a business that downgrades companies, flags financial risk, and generally exists to deliver bad news with a straight face — all while quietly compounding shareholder wealth at a remarkable clip. In 2025, while it was busy telling the rest of the world to watch its leverage, Moody's itself printed record revenue of $7.7 billion, expanded margins again, and grew adjusted EPS by 20%. The messenger, it turns out, is doing just fine.

The Numbers Don't Need a Credit Rating — They're AAA

Let's start with the headline. Full year 2025 revenue grew 9% to $7.7 billion, driven equally by the two businesses. Moody's Investors Service (MIS), the original ratings franchise, generated $4.1 billion in revenue with a stunning adjusted operating margin of 63.6% — up 350 basis points year-over-year. Moody's Analytics (MA), the subscription-driven data and intelligence arm, contributed $3.6 billion growing at the same 9% clip, with its own margin expanding 240 basis points to 33.1%.

The fourth quarter capped the year in style: revenue hit $1.9 billion (up 13%), Q4 adjusted EPS came in at $3.64, up 39% versus the prior year. Management called it "the strongest fourth quarter on record" for the MIS ratings business, and the numbers back that up.

What drove MIS? Global bond issuance surged past $6.6 trillion — a record. Investment-grade issuance was robust, high yield was active, and a wave of AI-related corporate debt transactions padded revenue nicely. Infrastructure Finance had its best Q4 ever. Even Public Finance in the U.S. saw heightened activity. When companies need capital and bond markets are open, Moody's rings the register.

The Recurring Revenue Transformation Nobody Talks About Enough

The story that deserves more airtime is what Moody's Analytics is quietly becoming. An extraordinary 97% of MA revenue is now recurring — subscription-based and embedded in client workflows. Annualized Recurring Revenue (ARR) hit $3.5 billion, up 8% from December 2024. The KYC (Know Your Customer) compliance segment within Decision Solutions grew ARR by 15%. That is not a coincidence — that is regulatory moat expansion.

Moody's is increasingly embedding itself into the compliance infrastructure of banks, insurers, and financial institutions globally. The more KYC regulations tighten, the more indispensable the platform becomes. This isn't a nice-to-have product. For a regulated institution, pulling out Moody's Analytics would trigger a compliance crisis. That kind of stickiness is worth more than a growth rate.

Private Credit: The Quiet Tailwind That Changes Everything

Perhaps the single most important structural signal buried in this report: private credit accounted for approximately 20% of MIS transaction revenue growth in 2025. The private credit market has ballooned past $2 trillion globally and continues to grow. As it matures, it requires ratings, risk analysis, and monitoring. Moody's is not a passive observer here — it is essential infrastructure for the entire ecosystem.

This is a market that barely existed a decade ago and now drives a meaningful slice of Moody's growth. It is not cyclical. It is not dependent on Fed policy or stock market sentiment. It is a structural expansion of the addressable market, and Moody's has positioned itself at the center of it.

Margin Expansion Is Not Slowing Down

What would you say about a business already running at 51% adjusted operating margins that expects to expand them again to 52-53% in 2026? That it has exceptional operating leverage. Revenue is guided to grow in the high single digits next year, while operating expenses grow only in the mid-single digits. The math is simple and it keeps working in Moody's favor.

Free cash flow came in at $2.575 billion in 2025, and management is guiding $2.8-3.0 billion for 2026. That is a 10% increase at the midpoint. Combined with approximately $2 billion in planned share repurchases and a growing dividend (the board just declared $1.03/share quarterly), shareholders are being rewarded with the fruits of a business that barely needs capital to grow.

Let’s Score MCO

Essentiality: 9/10 — Rating sovereign debt, corporate bonds, and structured finance is not optional for the global capital markets. Moody's Analytics embeds itself into compliance workflows regulators require. Pulling this product is not a budget decision; it is a crisis.

Current Moats: 9/10 — The oligopoly structure in credit ratings (Moody's, S&P, Fitch) creates a near-impenetrable regulatory and reputational moat. MA's switching costs compound with every integration into client systems.

Moats Expanding: 8/10 — KYC growing 15% ARR, private credit providing structural tailwinds, and AI-powered decision intelligence increasingly embedded in third-party systems. The moat is widening, not narrowing.

Balance Sheet Strength: 6/10 — $7 billion in outstanding debt is not trivial, though it is manageable given $2.5+ billion in annual FCF and a $1.25 billion undrawn credit facility. The leverage is purposeful, not dangerous, but this is not a fortress balance sheet.

EPS Acceleration: 8/10 — Adjusted EPS grew 20% in 2025 and is guided to grow another 10-14% in 2026. Q4 alone showed 39% growth. The trajectory is strong and the operating leverage engine is clearly working.

Net Margins Increasing: 8/10 — Adjusted operating margins expanded 300 basis points in 2025 to 51.1% and are guided to expand further. Both segments are contributing. This trend has been consistent and does not appear to be running out of road.

ROIC Profile: 8/10 — Asset-light model with high margins generates exceptional returns on capital. Even including goodwill from acquisitions, ROIC is comfortably above 15% and the capital-efficiency of the business continues to improve with scale.

Reinvestment Rate: 5/10 — The business invests meaningfully in analytics capabilities, AI tools, and platform development, but as a structurally low-capex operation, the absolute reinvestment rate is moderate. Growth is more organic than capital-intensive, which is fine — it just limits the reinvestment score.

Capital Return: 7/10 — $2.3 billion returned to shareholders in 2025 ($1.6B buybacks + $701M dividends), with $2 billion in buybacks guided for 2026. A freshly authorized $4 billion repurchase program signals management confidence. Solid, consistent, and growing.

Valuation (Reverse DCF): 4/10 — At roughly $485/share (177.5 million shares, ~$86 billion market cap), the FCF yield is approximately 3%. To justify the current price, you need to believe in roughly 10-12% annual FCF growth sustained over a decade — and that assumes a fair exit multiple. That is not an unreasonable assumption for Moody's, but it leaves little room for error or disappointment. Quality has a price, and here the price is high.

MCO Overall Score: 72/100

Moody's is one of the finest businesses on the planet — oligopoly-protected, asset-light, recurring-revenue driven, and expanding into structural growth markets like private credit and regulatory compliance. The 2025 results confirm the flywheel is spinning faster, not slower. The only honest challenge for new investors is the entry price: at current levels, near-perfect execution is already baked in. For long-term holders, this remains a core compounder. For those considering a fresh position, patience and a market dip would make this a more compelling opportunity. The messenger is excellent. Just make sure you're not paying for the news before it arrives. The business quality is undeniable. The valuation requires conviction. Right now it sits on my watchlist, which you can access in real-time in our community.

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