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Moody’s Corp. (MCO - Analyst Report) reported earnings of 85 cents per share in the fourth quarter of 2013, which jumped 21.0% from the year-ago quarter and beat the Zacks Consensus Estimate by 8 cents.

Quarter Details

Revenues increased 3.0% year over year to $779.2 million, which beat the Zacks Consensus Estimate of $746.0 million. The year-over-year growth was driven by strong performance from both Moody’s Investors Service (MIS) and Moody's Analytics (MA).

Domestic revenues increased 3.0% year over year to $417.2 million in the reported quarter. International revenues increased 3.0% year over year to $362.0 million in the quarter.

Segment-wise, MIS revenues increased 1.0% year over year to $522.8 million. MIS revenues in the U.S. declined 2.0% on a year-over-year basis, while revenues outside the U.S. increased 5.0% from the year-ago quarter.

Within the MIS segment, Global Corporate Finance revenues decreased 1.0% year over year to $242.6 million, reflecting a contraction in U.S. bond issuance.

Global Structured Finance revenues increased 6.0% year over year to $108.8 million, primarily due to weaker issuance volume in the overseas markets.

Global Financial Institutions revenues increased 3.0% year over year to $88.9 million in the quarter, due to higher revenues from asset management companies. Global public, project and infrastructure finance revenues were down 3.0% year over year to $82.5 million.

MA revenues grew 9.0% year over year to $256.4 million, buoyed by a strong increase in Research, Data and Analytics revenues (up 9.0%), Professional Services revenues (up 16.0%) and Enterprise Risk Solutions revenues (up 7.0%).

MA revenues increased 21.0% in the U.S., while outside the U.S. it increased 1.0% on a year-over-year basis in the reported quarter.

Operating expenses decreased 5.0% year over year to $467.3 million. As a result, operating income increased 20.0% year over year to $311.9 million in the fourth quarter. Operating margin was 40.0% compared with 34.5% in the year-ago quarter.  

Net income jumped 29.1% year over year to $206.7 million in the reported quarter.

Moody's exited the quarter with $2.11 billion in cash and cash equivalents and short-term investments. At quarter-end, Moody’s had $2.10 billion in outstanding debt. The company bought back 2.0 million shares for $145.5 million during the quarter.

Guidance

Moody’s expects 2014 revenues to grow in the high single-digit percent range. Operating expenses are projected to increase in the mid single-digit percent range. Operating margin is projected to be between 42% and 43%.

Earnings for 2014 are expected to be in the range of $3.90 to $4.00 per share. The mid-point of the guidance is much better than the Zacks Consensus Estimate of $3.92.

For 2014, share repurchases are expected to be approximately $1.0 billion. Capital expenditure is projected to be approximately $90.0 million. Moody’s expects approximately $100.0 million in depreciation and amortization expense. Free cash flow is expected to be $900.0 million.

MIS revenues for 2014 are expected to increase in the mid single-digit percent range. U.S. MIS revenues are expected to increase in the low single-digit percent range, while non-U.S. MIS revenues are expected to increase in low-double digit percent range.

Corporate finance revenues are projected to grow in the high single-digit percent range. Revenues from structured finance are expected to grow in the low single-digit percent range, while revenues from financial institutions are expected to grow in the mid single-digit range. Public, project and infrastructure finance revenues are expected to increase in the high single-digit range.

MA revenues for 2013 are expected to increase in the high single-digit percent range. In the U.S., revenues are expected to increase in the low double-digit percent range. Non-U.S. revenues are expected to increase in the mid single-digit percent range.

Revenues from research, data and analytics are projected to grow in the high-single-digit percent range. Revenues from enterprise risk solutions are expected to grow in the low-teens percent range. Professional services revenues are expected to grow in the mid forties range.

Our Recommendation

Moody’s provided positive outlook for 2014. We believe that Moody’s remains a solid franchise in rating debt instruments based on its diversified credit research business model and international growth opportunities. However, the company’s modest third-quarter result and cautious revenue projections suggest sluggish macroeconomic environment in our view.

Moreover, increasing competition from the likes of privately held Fitch, McGraw Hill Financial’s (MHFI - Analyst Report) Standard & Poor's division, Dun & Bradstreet (DNB - Analyst Report) and Euronet (EEFT - Snapshot Report) is a major concern, going forward.

Currently, Moody’s has a Zacks Rank #3 (Hold).

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