A month has gone by since the last earnings report for Moody's Corporation (MCO - Free Report) . Shares have added about 5.6% in that time frame.
Will the recent positive trend continue leading up to its next earnings release, or is MCO 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 on Q1 Earnings & Revenues, Affirms View
Moody's reported first-quarter 2018 adjusted earnings of $2.02 per share, which handily surpassed the Zacks Consensus Estimate of $1.78. Also, the bottom line improved 35% from the year-ago quarter.
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 consideration amortization of all acquisition-related intangible assets and acquisition-related expenses, Moody’s net income was $372.9 million or $1.92 per share. This compared favorably with net income of $345.6 million or $1.78 per share in the prior-year quarter.
Revenues & Costs Increase
Quarterly revenues of $1.13 billion beat the Zacks Consensus Estimate of $1.10 billion. Also, revenues increased 16% year over year. The quarter witnessed higher domestic and international revenues. Foreign currency translation favorably impacted the top line by 4%.
Total expenses were $635.9 million, up 20% from the prior-year quarter. Inclusion of Bureau van Dijk operating expenses and acquisition-related costs were the main reasons for the rise.
Adjusted operating income of $540.7 million jumped 13% year over year.
Adjusted operating margin came in at 48%, down from 49.1% in the year-ago quarter.
Segment Performance Improves in Q1
Moody’s Investors Service revenues increased 8% year over year to $719.9 million, driven by growth in U.S. revenues as well as international revenues. Foreign currency translation favorably impacted segment revenues by 3%
Corporate finance revenues improved, driven by strong U.S. investment grade bond, EMEA bank loans and growth in recurring revenues. Also, structured finance revenues witnessed a rise, mainly driven by strength in securitization markets.
Further, financial institutions’ revenues improved, primarily reflecting growth in issuance from EMEA banks and U.S. insurance companies, partly offset by a fall in activity from Asian and U.S. banks. However, the company recorded a decline in global public, project and infrastructure finance revenues due to a decrease in U.S. municipal issuance.
Moody’s Analytics revenues jumped 33% year over year to $406.8 million, mainly driven by higher non-U.S. revenues. Notably, foreign currency translation favorably impacted the segment’s revenues by 4%.
The segment recorded growth in research, data and analytics revenues, professional services revenues and Enterprise Risk Solutions revenues.
As of Mar 31, 2018, Moody’s had total cash, cash equivalents and short-term investments of $1.38 billion, up 16% from Dec 31, 2017 level. Further, Moody’s had $5.5 billion of outstanding debt and $910 million of additional borrowing capacity under its revolving credit facility.
During the reported quarter, the company repurchased 0.3 million shares for $43.4 million.
Management anticipates earnings per share to be $7.20 to $7.40, while adjusted earnings (excluding nearly 40 cents per share of acquisition-related intangibles and roughly 5 cents per share related to acquisition-related expenses) are expected to be in the range of $7.65 to $7.85 per share. Both projections include a roughly 65 cents per share benefit resulting from the U.S. tax reform and an estimated 20 cents per share benefit related to the tax accounting for equity compensation.
Moody’s anticipates revenues to increase in the low-double-digit percent range. Operating expenses are projected to rise in the low-double-digit percent range.
Adjusted operating margin is expected to be approximately 48% and operating margin is expected to be in the 43-44% range.
Moody’s expects cash flow from operations to be about $1.7 billion and free cash flow of about $1.6 billion. Capital expenditures are likely to be about $120 million while depreciation and amortization expenses are estimated to be around $200 million.
Share repurchases are estimated to be $200 million. Moody’s kept the dividend payout ratio of 25-30% intact.
The effective tax rate is expected to be in the range of 22-23%.
Segment Outlook for 2018
MIS segment revenues are likely to increase in the mid-single-digit percent range. The company expects U.S. revenues to rise in the low-single-digit percent range while non-U.S. revenues are projected to grow in the high-single-digit percent range.
Also, corporate finance revenues are expected to increase in high-single-digit percent range while both financial institutions revenues and structured finance revenues will likely grow in the mid-single-digit percent range. However, public, project and infrastructure finance revenues are expected to decline in the low-single-digit percent range.
Regarding MA segment, Moody’s anticipates revenues to grow in the mid-20s percent range. Excluding Bureau van Dijk, segment revenues are expected to rise in the low-double-digit percent range.
U.S. revenues are expected to increase in the low-double-digit percent range while non-U.S. revenues are estimated to be up in the mid-30s percent range.
Research, data and analytics revenues are expected to increase nearly 40%. Excluding Bureau van Dijk, RD&A revenues are expected to increase in the mid-teens percent range. Revenue contribution from Bureau van Dijk will be reduced approximately $16 million due to a deferred revenue adjustment required as part of acquisition accounting.
Further, enterprise risk solutions revenues are likely to grow in the low-single-digit percent range while professional services revenues are anticipated to increase in the high-single-digit percent range.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been six revisions lower for the current quarter.
Moody's Corporation Price and Consensus
At this time, MCO has an average Growth Score of C, however its Momentum is doing a bit better with a B. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% 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 more suitable for momentum investors than growth investors.
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, MCO has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.