We expect Moody's Corporation (MCO - Free Report) to beat expectations when it reports third-quarter 2016 results on Oct 21. In the last quarter, it had posted a positive earnings surprise of 4.00%. Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Moody’s is likely to beat earnings estimates this quarter. A stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. Moody’s has the right combination of the two key components.
Zacks ESP: The company has an Earnings ESP of +1.70%. This is because the Most Accurate estimate stands at $1.20 while the Zacks Consensus Estimate is pegged lower at $1.18.
Zacks Rank: Moody’s carries a Zacks Rank #2, which when combined with a positive ESP make us reasonably confident of an earnings beat.
Conversely, the Sell-rated stocks (Rank #4 and 5) should never be considered going into an earnings announcement.
What is Driving the Better-than-Expected Earnings?
Moody’s, along with Standard & Poor’s a unit of S&P Global, Inc. (SPGI - Free Report) , holds a dominant position in the duopolistic credit rating industry. Moody’s is also pursuing growth in areas outside the core credit ratings service for public fixed-income securities. Over the last couple of years, it has increased its exposure to the banking and insurance industry, branching into the emerging and fast growing professional services and enterprise risk solutions sectors.
It has also gained significant market share in the analytics business based on its strong product portfolio. Approximately 51% of Moody’s revenues are recurring in nature, which lends stability and predictability to the revenue stream.
Acquisitions have also given the company increased scale and cross-selling opportunities across products and vertical markets. We believe the company will continue to pursue acquisitions (especially in Asia and Latin America), which are good strategic fits and also diversify its revenue base over the long term. Its strong balance sheet is an added positive and will help it to pursue acquisitions as well as shareholder friendly policies.
On Sep 30, 2016, Moody’s upgraded some aspects of its outlook for 2016 driven by its cost-cutting efforts as well as an increase in issuance activity.
Other Stocks to Consider
Here are some stocks worth considering that, as per our model, have the right combination of elements to post an earnings beat this quarter:
Amazon.com, Inc. (AMZN - Free Report) , slated to report third-quarter earnings results on Oct 27, with an Earnings ESP of +6.98% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Seagate Technology plc (STX - Free Report) , with an Earnings ESP of +3.37% and a Zacks Rank #2. The company is slated to report first-quarter fiscal 2017 results before the market opens on Oct 19.
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