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Why Is Moody's (MCO) Up 7.9% Since Last Earnings Report?

It has been about a month since the last earnings report for Moody's (MCO). Shares have added about 7.9% 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 & Revenues Lag, Expenses Down

Moody's reported fourth-quarter 2018 adjusted earnings of $1.63 per share, which missed the Zacks Consensus Estimate of $1.71. However, the figure improved 8% from the year-ago quarter.

Weak global bond issuance volume hurt results and also adversely impacted performance of Moody’s Investors Service segment. However, decline in operating expenses and decent Moody’s Analytics segment performance were the tailwinds.

After taking into consideration certain non-recurring items, Moody’s net income was $252.7 million or $1.29 per share. This compared favorably with net income of $28.5 million or 13 cents per share in the prior-year quarter.

For 2018, adjusted earnings per share of $7.39 lagged the consensus estimate of $7.48. However, it was up 22% year over year. After considering non-recurring items, net income was $1.32 billion, up 31%.

Revenues & Costs Down

Quarterly revenues of $1.06 billion lagged the Zacks Consensus Estimate of $1.15 billion. Also, the top line decreased 9% year over year. Foreign currency translation unfavorably impacted the top line by 1%.

For 2018, revenues came in at $4.44 billion, which missed the Zacks Consensus Estimate of $4.53 billion. Nonetheless, it increased 6% from the prior year. Notably, foreign currency translation favorably impacted revenues by 1%.

Total expenses were $683.5 million, down 2% year over year. Lower accruals for 2018 incentive compensation awards were partially offset by restructuring charges. Notably, foreign currency translation favorably impacted operating expenses by 2%.

Adjusted operating income of $477.8 million decreased 8% year over year.

Adjusted operating margin came in at 45.1%, up from 44.7% a year ago.

Quarterly Segment Performance

Moody’s Investors Service revenues decreased 18% year over year to $595.4 million due to lower global debt issuance activity. Foreign currency translation unfavorably impacted the top line by 1%.

Corporate finance revenues declined owing to fall in issuance activity across all asset classes, with particular weakness in U.S. and EMEA speculative grade bonds. Also, structured finance revenues witnessed a fall, mainly due to lower U.S. commercial real estate issuance.

Further, the company recorded a decrease in global public, project and infrastructure finance revenues due to reduced U.S. public finance, and U.S. and EMEA infrastructure finance issuance.

Moreover, financial institutions’ revenues fell primarily due to a decline in global banking and U.S. insurance issuance.

Moody’s Analytics revenues grew 5% year over year to $464.7 million, mainly driven by higher U.S. revenues as well as international revenues. Notably, foreign currency translation unfavorably impacted the segment’s revenues by 2%.

The segment recorded growth in research, data and analytics revenues and professional services revenues while Enterprise Risk Solutions revenues declined.

Strong Balance Sheet

As of Dec 31, 2018, Moody’s had total cash, cash equivalents and short-term investments of $1.82 billion, up 54% from Dec 31, 2017 level. Further, it had $5.7 billion of outstanding debt and $1 billion of additional borrowing capacity under its revolving credit facility.

Share Repurchases Update

During the reported quarter, the company repurchased 0.3 million shares for $55.4 million.

2019 Guidance

Moody’s expects its adjusted earnings to be in the range of $7.85-8.10 per share. On a GAAP basis, earnings are expected to be in the $7.30-$7.55 per share range.

The company’s cost saving initiative, which is expected to result in an aggregate charge of $45-$60 million through the first half of 2019, is projected to lead to annualized pre-tax savings of $40-$50 million, going forward, higher than the prior target of $30-$40 million.

The company expects net interest expenses to be nearly $200-$225 million.

Moody’s anticipates both revenues and operating expenses to rise in the mid-single-digit percent range.

Adjusted operating margin is expected to be approximately 48% and operating margin is likely to be nearly 43%.

Moody’s expects cash flow from operations to be about $1.7-$1.8 billion and free cash flow to be about $1.6-$1.7 billion.

Share repurchases are estimated to be $1 billion.

The effective tax rate is expected to be 21-22%.

Segmental Outlook for 2019

MIS segment revenues are likely to increase in the low-single-digit percent range. Also, the company expects U.S. revenues to increase in the low-single-digit percent range. However, non-U.S. revenues are projected to remain flat. Adjusted operating margin is expected to be 58%.

Regarding the MA segment, Moody’s anticipates revenues to grow in the low-double-digit percent range. U.S. revenues are expected to increase in the mid-teens percent range and non-U.S. revenues are estimated to increase in the high-single-digit percent range. Adjusted operating margin is expected to be 29-30%.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month.

VGM Scores

At this time, Moody's has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

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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