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Why Is Moody's (MCO) Up 2.4% Since the Last Earnings Report?

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A month has gone by since the last earnings report for Moody's Corporation (MCO - Free Report) . Shares have added about 2.4% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Moody's Beats Q2 Earnings Expectations, Guides Up

Moody's reported second-quarter 2017 adjusted earnings of $1.51 per share, which handily outpaced the Zacks Consensus Estimate of $1.33. Also, the bottom line improved 16% from the year-ago quarter.

Better-than-expected results were attributable to impressive revenue growth, reflecting strong issuance in the quarter. Also, both Moody’s Investors Service and Moody’s Analytics segments witnessed improved performance. However, higher expenses were on the downside.

After taking into considering unrealized gain on a foreign currency collar to economically hedge the Bureau van Dijk euro-denominated purchase price and acquisition-related costs, Moody’s net income was $313.6 million or $1.61 per share. This was up from $258.1 million or $1.30 per share in the prior-year quarter.

Revenues Increase, Costs Rise

Revenues of $1 billion beat Zacks Consensus Estimate of $943.7 million. Also, revenues grew 8% year over year. The quarter witnessed higher domestic and international revenues. The impact of foreign currency translation was insignificant.

Total expenses were $543 million, up 5% from the prior-year quarter. A rise in operating expenses, and depreciation and amortization costs were partially offset by a decline in selling, general and administrative expenses. The reported quarter also included $6.6 million of acquisition-related expenses.

Adjusted operating income of $497 million jumped 13% year over year. Adjusted operating margin came in at 45.7%, up from 44.2% in the year-ago quarter.

Segment Performance Improves

Moody’s Investors Service revenues jumped 10% year over year to $686.7 million, driven by growth in U.S. revenues as well as international revenues.

Strong global leveraged finance issuance led to growth in global corporate finance revenues. Also, global structured finance revenues witnessed a rise mainly driven by increased issuance of U.S. CLOs.

Further, global financial institutions’ revenues improved, primarily reflecting rise in issuance from infrequent issuers. However, owing to a fall in U.S. issuance and a change in mix of European infrastructure issuance, the company recorded decline in global public, project and infrastructure finance revenues.

Moody’s Analytics revenues grew 4% year over year to $313.8 million, mainly due to higher U.S. revenues. Foreign currency translation impact was immaterial.

The segment recorded growth in research, data and analytics revenues (up 7% year over year to $180.9 million) and stable Enterprise Risk Solutions revenues of $97.3 million. However, global professional services revenues declined 5% from the prior-year quarter to $35.6 million.

Strong Balance Sheet

As of Jun 30, 2017, Moody’s had total cash, cash equivalents and short-term investments of $3.4 billion, up 51% from $2.22 billion as of Dec 31, 2016.

During the reported quarter, the company repurchased 0.7 million shares for $79.5 million.

2017 Guidance

Earnings per share are now projected to be $5.69 to $5.84 (up from the previous outlook of $5.46–$5.61) and include CCXI gain of 31 cents, the purchase price hedge gain of 13 cents and acquisition-related expenses of 10 cents. Excluding these, adjusted earnings are now expected to be in the range of $5.35 to $5.50 (up from the prior outlook of $5.15–$5.30).

Moody’s now anticipates revenues to increase in the high-single-digit percent range. This was revised up from the prior growth projection of mid-single-digit percent range. The company expects foreign exchange to have a 2% favorable impact on revenue growth.

Operating expenses are projected to decline in the range of 25–30%. Adjusted operating expenses are estimated to grow in the mid-single-digit percent range.

Adjusted operating margin is expected to be approximately 47% (revised up from prior outlook of 46%) and operating margin is expected to be 43%.

Moody’s expects cash flow from operations to be about $600 million and free cash flow of about $500 million. Share repurchases are estimated to be $200 million. Capital expenditures are likely to be about $100 million while depreciation and amortization expense is estimated to be around $135 million.

The effective tax rate is now expected to be roughly 30%.

Moody’s lowered its share repurchase authorization to $200 million for both 2017 and 2018 (down from $500 million guided earlier) while keeping the dividend payout ratio of 25–30% intact.

Segment Outlook for 2017

MIS segment revenues are likely to increase in the high-single-digit percent range (up from the mid-single-digit percent range outlook). The company expects U.S. revenues to rise in the mid-single-digit percent range while non-U.S. revenues are now projected to grow in the low-teens percent range (up from the prior guidance of the mid-single-digit percent range).

Also, corporate finance revenues are now expected to increase in the low-teens percent range, while financial institutions revenues will likely grow in the high-single-digit percent range (both up from the mid-single-digit percent range as previously guided).

Structured finance revenues are anticipated to grow in the mid-single-digit percent range. Public, project and infrastructure finance revenues are projected to increase in the low-single-digit percent range.

Regarding MA segment, Moody’s anticipates revenues to grow in the high-single-digit percent range (a rise from the prior outlook of mid-single-digit percent range). U.S. revenues are expected to increase in the mid-single-digit percent range (up from the low-single-digit percent range as earlier guided) while non-U.S. revenues are estimated to be up in the low-double digit percent range (an increase from the prior outlook of high-single-digit percent range).

Research, data and analytics revenues are expected to increase in the low-double-digit percent range (up from the high-single-digit percent range as previously guided). Enterprise risk solutions revenues are likely to grow in the mid-single-digit percent range while professional services revenues are anticipated to increase in the low-single-digit percent range.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been two revisions higher for the current quarter compared to one lower.

Moody's Corporation Price and Consensus

 

VGM Scores

At this time, the stock has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate that the stock is equally suitable for momentum and growth investors.

Outlook

While estimates have been moving upward, the magnitude of the revision is net zero. It comes with little surprise that the stock a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.


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