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Moody's Crushes 3Q Estimates

MCO DNB

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Moody’s Corp. (MCO - Analyst Report) reported third quarter 2012 earnings of 75 cents per share, beating the Zacks Consensus Estimate by 11 cents. Earnings jumped 31.6% year over year, primarily due to strong top-line growth.

Quarter Details

Revenue surged 29.6% year over year to $688.5 million and exceeded the Zacks Consensus Estimate of $622.0 million. The better-than-expected result was driven by strong performance from both Moody’s Investors Service (“MIS”) and Moody's Analytics (“MA”) division. Domestic revenue soared 36.9% year over year to $375.4 million, while international revenues jumped 21.8% to $313.1 million in the quarter.

Segment wise, Moody’s Investors Service (MIS) revenues jumped 34.7% year over year to $473.5 million. MIS revenues in the U.S. leaped 45.0%, while revenues outside the U.S. increased 21.0% from the year-ago quarter.

Within the MIS segment, Global Corporate Finance revenues surged 71.1% year over year to $220.7 million, while Global Structured Finance revenues jumped 13.5% year over year to $93.1 million. Global Financial Institutions revenue increased 14.7% year over year to $82.7 million. Global public, project and infrastructure finance revenue was up 12.7% year over year to $77.0 million.

MA revenue grew 19.5% year over year to $215.0 million, buoyed by an increase in Research, Data and Analytics revenues (up 7.4%), Professional services revenues (up 97.1%) and enterprise risk solutions revenues (up 26.0%). MA revenues increased 14.0% in the US, while outside the U.S, it rose 23.0% on a year-over-year basis in the reported quarter.

Operating expenses increased 25.0% year over year to $418.8 million due to higher compensation and increased headcount.

Nevertheless, operating income jumped 37.4% year over year to $269.7 million in the third quarter. Operating margin expanded 230 basis points (“bps”) to 39.2%, primarily due to higher revenue base.

Net income soared 40.7% year over year to $183.9 million in the reported quarter.

Moody's exited the quarter with $1.54 billion in cash and cash equivalents and short-term investments compared with $839.5 million in the previous quarter. At quarter end, Moody’s had $1.71 billion in outstanding debt and had additional debt capacity of $1.0 billion under its revolving credit facility.

Guidance

Moody’s raised its earnings outlook to a range of $2.89 to $2.99 from the prior outlook of $2.70 to $2.80 for fiscal 2012. For fiscal 2012, Moody’s expects revenues to increase in mid-teens percent range. However, expenses are also projected to increase in mid-teens percent range. Operating margin is projected to be approximately 43%.

Segment wise, global MIS revenue is expected to increase in the mid teens percent range for fiscal 2012. MA revenue will likely increase in the high-teens percent range for fiscal 2012.

Recommendation

We believe that Moody’s remains a solid franchise in rating debt instruments based on its diversified credit research business model and international growth. However, increasing regulatory complications and cut-throat competition from Dun & Bradstreet Corp (DNB - Analyst Report) and privately-held Fitch Ratings Inc. and Standard & Poor’s Financial Services LLC may hurt its profitability going forward.

We remain Neutral on a long-term basis (6-12 months). Currently, Moody’s has a Zacks #2 Rank, which implies a Buy rating in the short term (1-3 months).

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