It has been about a month since the last earnings report for Moody's (MCO - Free Report) . Shares have lost about 3.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Moody's due for a breakout? 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 catalysts.
Moody's Misses on Q3 Earnings & Revenues, Cuts View
Moody's reported third-quarter 2018 adjusted earnings of $1.69 per share, which missed the Zacks Consensus Estimate of $1.78. However, the bottom line improved 11% from the year-ago quarter.
Weak global bond issuance volume hurt the results and also adversely impacted performance of Moody’s Investors Service segment. However, stable expenses and decent Moody’s Analytics segment performance were the tailwinds.
After taking into consideration amortization of all acquisition-related intangible assets, Moody’s net income was $312 million or $1.59 per share. This compared unfavorably with net income of $319.7 million or $1.63 per share in the prior-year quarter.
Revenues Increase, Costs Stable
Quarterly revenues of $1.08 billion lagged the Zacks Consensus Estimate of $1.12 billion. However, the top line increased 2% year over year. The quarter witnessed higher international revenues. Foreign currency translation had immaterial impact on the top line in the reported quarter.
Total expenses were $614 million, relatively stable year over year. Inclusion of Bureau van Dijk operating expenses and incremental compensation costs related to salary adjustments and hiring were offset by lower accruals for 2018 incentive compensation awards. Notably, foreign currency translation favorably impacted operating expenses by 1%.
Adjusted operating income of $514.2 million increased 3% year over year.
Adjusted operating margin came in at 47.6%, up from 47.2% a year ago.
Moody’s Investors Service revenues decreased 7% year over year to $644.8 million due to lower U.S. revenues as well as international revenues. The impact of foreign currency translation on revenues was negligible.
Corporate finance revenues declined owing to fall in U.S. investment grade and global high yield bond issuance activity. Also, structured finance revenues witnessed a fall, mainly due to lower U.S. CMBS rated issuance, partially offset by contribution from collateralized loan obligations.
Further, the company recorded a decrease in global public, project and infrastructure finance revenues due to a decline in global infrastructure and project finance issuance.
However, financial institutions’ revenues improved, primarily reflecting growth in issuance activity from M&A-related financing in the U.S. insurance sector.
Moody’s Analytics revenues grew 18% year over year to $436 million, mainly driven by higher U.S. revenues as well as international revenues. Notably, foreign currency translation unfavorably impacted the segment’s revenues by 1%.
The segment recorded growth in research, data and analytics revenues and professional services revenues, while Enterprise Risk Solutions revenues were stable.
Strong Balance Sheet
As of Sep 30, 2018, Moody’s had total cash, cash equivalents and short-term investments of $1.15 billion, down 3% from Dec 31, 2017 level. Further, Moody’s had $5 billion of outstanding debt and $975 million of additional borrowing capacity under its revolving credit facility.
During the reported quarter, the company repurchased 0.4 million shares for $66.2 million.
2018 Earnings Guidance Lowered
On the assumption of soft debt issuance into fourth-quarter 2018, Moody’s lowered its adjusted earnings outlook in the range of $7.50-7.65 per share from $7.65-$7.85. On GAAP basis, earnings are now expected to be in the $6.95-$7.10 per share range (down from the prior outlook of $7.20 to $7.40).
Further, in response to this slowdown in bond issuances, the company plans to undertake cost management initiative, which will result in restructuring charge of $30-$40 million in the fourth quarter and an aggregate charge through the first half of 2019 in the range of $45-$60 million. These efforts are projected to lead to incremental annualized savings of $30-$40 million, going forward.
Moody’s anticipates both revenues and operating expenses to rise in the high-single-digit percent range.
Adjusted operating margin is expected to be approximately 48% and operating margin is expected to be nearly 43% (down from prior outlook of 44%).
Moody’s now expects cash flow from operations to be about $1.6 billion (lower from earlier guidance of $1.7 billion) and free cash flow to be about $1.5 billion (a decline from $1.6 billion as previously guided). Capital expenditures are likely to be about $85 million (down from previous outlook of $105 million) while depreciation and amortization expenses are estimated to be around $195 million.
Share repurchases are estimated to be $200 million.
The effective tax rate is expected to be 22-23%.
Segment Outlook for 2018
MIS segment revenues are now likely to increase in the low-single-digit percent range, down from mid-single-digit percent range. The company now expects U.S. revenues to be nearly stable, (lower from earlier outlook of rise in the low-single-digit percent range) while non-U.S. revenues are projected to grow in the mid-single-digit percent range.
Corporate finance revenues are now expected to be relatively stable compared with prior outlook of increase in the low-single-digit percent range. Financial institutions revenues will likely grow in the mid-single-digit percent range while structured finance revenues will now grow in the high-single-digit percent range, down from earlier outlook of rise in the low-double-digit percent range. However, public, project and infrastructure finance revenues are expected to decline in the mid-single-digit percent range.
Regarding the MA segment, Moody’s anticipates revenues to grow in the low-20s percent range. Excluding Bureau van Dijk, segment revenues are expected to rise in the high-single-digit percent range.
U.S. revenues are expected to increase almost 10%, (up from previous outlook of increase in the high-single-digit percent range) while non-U.S. revenues are estimated to be up in the low-30s percent range.
Research, data and analytics revenues are expected to increase in the high-30s percent range. Excluding Bureau van Dijk, RD&A revenues are expected to increase in the low-teens percent range. Further, enterprise risk solutions revenues are likely to decrease 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. The consensus estimate has shifted -5.1% due to these changes.
At this time, Moody's has a nice Growth Score of B, 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 lowest quintile 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 downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Moody's has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.