A month has gone by since the last earnings report for Moody's (
MCO Quick Quote MCO - Free Report) . Shares have added about 4.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Moody's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Moody's Q4 Earnings Miss Estimates, Revenues Rise Y/Y
Moody's reported fourth-quarter 2020 adjusted earnings of $1.91 per share, which missed the Zacks Consensus Estimate of $1.97. Also, the bottom line declined 5% from the year-ago quarter.
Results were hurt by higher operating expenses and soft bond issuance volume. However, revenue growth, mainly on the back of solid MA business and robust liquidity position, acted as tailwinds. After taking into consideration certain non-recurring items, net income attributable to Moody's Corporation was $314 million or $1.66 per share, down from $359 million or $1.88 per share in the prior-year quarter. In 2020, adjusted earnings per share of $10.15 lagged the consensus estimate of $10.19 but was up 22% year over year. Net income (GAAP basis) was $1.78 billion or $9.39 per share, up from $1.42 billion or $7.42 per share in 2019. Revenues Improve, Costs Up
Quarterly revenues of $1.29 billion beat the Zacks Consensus Estimate of $1.22 billion. Also, the top line grew 5% year over year. Foreign currency translation favorably impacted the top line by 2%.
In 2020, revenues grew 11% to $5.37 billion. The top line also surpassed the consensus estimate of $5.31 billion. Total expenses were $846 million, up 16% from the prior-year quarter. Severance and restructuring charges associated with the exit of certain real estate and a strategic reorganization of MA segment, incentive compensation and sales commissions, as well as M&A related activity were the primary reasons for the rise. Also, foreign currency translation negatively impacted operating expenses by 1%. Adjusted operating income of $531 million decreased 5%. Adjusted operating margin was 41.2%, down from 45.3% a year ago. Decent Q4 Segment Performance revenues grew 2% year over year to $735 million. Foreign currency translation favorably impacted the segment’s revenues by 2%. Moody’s Investors Service Corporate finance revenues increased from the prior-year period, driven by solid contributions from U.S. bank loans and speculative grade bonds, which were partly offset by lower global investment grade issuances. Also, financial institutions’ revenues grew, primarily backed by favorable mix of infrequent U.S. bank issuers. However, public, project and infrastructure finance revenues decreased from the year-ago level, reflecting weak U.S. public finance issuance. Further, structured finance revenues declined, mainly due to lower commercial mortgage-backed securities activity and muted residential mortgage-backed security pipeline at the year-end. revenues grew 8% year over year to $555 million. Foreign currency translation favorably impacted the segment’s revenues by 2%. Moody’s Analytics The segment recorded growth in research, data and analytics revenues, as well as ERS revenues. Strong Balance Sheet
As of Dec 31, 2020, Moody’s had total cash, cash equivalents and short-term investments of $2.7 billion, up from $1.9 billion on Dec 31, 2019. Further, it had $6.4 billion of outstanding debt and $1 billion in additional borrowing capacity under the revolving credit facility.
Share Repurchase Update
During the fourth quarter, Moody's repurchased 0.9 million shares for $250 million.
The company expects adjusted earnings in the range of $10.30-$10.70 per share. On GAAP basis, earnings are expected within $9.70-$10.10 per share.
The company projects revenues and operating expenses to increase in the mid-single-digit percent range. It expects net interest expenses of $190-210 million. Adjusted operating margin is expected to be 49-50% and operating margin is likely to be nearly 45%. Moody’s expects cash flow from operations to be $2-$2.2 billion and free cash flow of $1.9-$2.1 billion. The company will likely repurchase shares worth $1.5 billion. Effective tax rate is likely to be 20-22%. Segment Outlook for 2021 MIS segment revenues are likely to remain flat year over year. Adjusted operating margin is expected to be approximately 60%. Coming to the MA segment, Moody’s anticipates revenues to grow in the low-double-digit percent range. Adjusted operating margin is expected to be 30%. How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
At this time, Moody's has an average Growth Score of C, however its Momentum Score is doing a bit better with a B. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. Notably, Moody's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.