Moody's (MCO) Up 9.6% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for Moody's (MCO). Shares have added about 9.6% 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 Beats on Q1 Earnings, Revenues Rise Y/Y
Moody's reported first-quarter 2020 adjusted earnings of $2.73 per share, which outpaced the Zacks Consensus Estimate of $2.30. Also, the figure improved 32% from the year-ago quarter.
Revenue growth on the back of impressive global bond issuance volume largely drove the results. However, higher operating expenses were an undermining factor.
After taking into consideration certain non-recurring items, net income was $487 million or $2.57 per share, up from $374 million or $1.93 per share in the prior-year quarter.
Revenues & Costs Rise
Revenues of $1.29 billion beat the Zacks Consensus Estimate of $1.22 billion. Also, the top line grew 13% year over year. Foreign currency translation impacted the top line unfavorably by 1%.
Total expenses were $698 million, up 3% year over year. The rise was supported by disciplined cost management and lower incentive compensation accruals, partly offset by higher bad debt reserves owing to the coronavirus outbreak. Nonetheless, foreign currency translation favorably impacted operating expenses by 1%.
Adjusted operating income of $649 million increased 25% year over year. Adjusted operating margin was 50.3%, up from 45.4% a year ago.
Segment Performance
Moody’s Investors Service revenues grew 19% year over year to $794 million, attributable to rise in issuance activity. Foreign currency translation unfavorably impacted the segment’s revenues by 1%.
Corporate finance revenues increased from the prior-year period, driven by robust bond issuances. Also, financial institutions’ revenues grew year over year, primarily backed by rise in activities from U.S. banks and insurance companies.
Further, public, project and infrastructure finance revenues increased from the year-ago level, reflecting strong U.S. public finance issuance, as well as solid project and infrastructure issuance in EMEA. However, structured finance revenues fell from the prior-year figure, mainly due to lower global collateralized loan obligation activity.
Moody’s Analytics revenues grew 5% year over year to $496 million. Foreign currency translation unfavorably impacted the segment’s revenues by 1%.
The segment recorded growth in research, data and analytics revenues, as well as Enterprise Risk Solutions revenues.
Strong Balance Sheet
As of Mar 31, 2020, Moody’s had total cash, cash equivalents and short-term investments of $2.2 billion, up from $1.9 billion on Dec 31, 2019. Further, it had $6.8 billion of outstanding debt and $1 billion in additional borrowing capacity under the revolving credit facility.
Share Repurchases Update
During the first quarter, the company repurchased 1.1 million shares for $253 million. Notably, the company has suspended share repurchases in response to the coronavirus pandemic.
2020 Guidance
Moody’s expects the economic implications of the coronavirus outbreak to be more pronounced through the second half of the year. Hence, the company has lowered its 2020 earnings guidance to reflect high level of ambiguity.
Moody’s expects adjusted earnings in the range of $7.80-$8.40 per share (down from the prior expectation of $9.10-$9.30 per share). On GAAP basis, earnings are expected within $7.25-$7.85 per share, lower than the earlier guided range of $8.60-$8.80 per share.
Moody’s now projects revenues to decline in the mid-single-digit percent range versus the prior guidance of revenue growth in the mid-single-digit percent range.
Operating expenses are expected to decrease in the mid-single-digit percent range versus the prior guidance of increase of the same in the low-single-digit percent range.
The company expects net interest expenses in the range of $180-200 million.
Adjusted operating margin is expected in the band of 46-48% (down from prior guided range of 48-49%) and operating margin is likely to be within 41-43% (earlier expectation was of approximately 44%).
Moody’s expects cash flow from operations in the $1.3-$1.5 billion band (down from the $1.8-$1.9 billion range) and free cash flow within $1.2-$1.4 billion (lower than $1.7-$1.8 billion).
Effective tax rate is likely to be in the 19.5-21.5% range (a change projection was 20-22%).
Segment Outlook for 2020
The MIS segment revenues are likely to decline in the high-single-digit percent range versus prior view of increase in the low-single-digit percent range. The key reason behind the dismal guidance is the impact of the coronavirus outbreak on the global economy.
Adjusted operating margin is expected within 55-57%, lower than the prior guided range of 58-59%.
Coming to the MA segment, Moody’s anticipates revenues to grow in the mid-single-digit percent range (versus prior expectation of rise in high-single-digit percent range). Adjusted operating margin is expected to be 30%.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -13.16% due to these changes.
VGM Scores
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 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.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Moody's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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