Moody's Beats on Q1 Earnings, Revs - Analyst Blog

Moody's Corp. MCO reported earnings of $1.00 per share in the first quarter of 2014, which inched up 3.1% from the year-ago quarter and beat the Zacks Consensus Estimate by a dime.

Quarter Details

Revenues increased 5.0% year over year to $767.2 million, which beat the Zacks Consensus Estimate of $762.0 million. The year-over-year growth was driven by strong performance from Moody's Analytics MA.

Domestic revenues increased 4.0% year over year to $425.6 million in the reported quarter. International revenues increased 6.0% year over year to $341.6 million in the quarter.

Segment-wise, Moody's Investors Service (MIS) revenues increased 1.0% year over year to $525.8 million. MIS revenues in the U.S. increased 1.0% on a year-over-year basis. Revenues outside the U.S. also increased 1.0% from the year-ago quarter.

Within the MIS segment, Global Corporate Finance revenues increased 2.0% year over year to $264.4 million, reflecting increased bank loan issuance in the U.S. as well as in Europe. Global Structured Finance revenues increased 2.0% year over year to $95.3 million.

Global Financial Institutions revenues decreased 1.0% year over year to $85.4 million in the quarter. Global public, project and infrastructure finance revenues were down 3.0% year over year to $80.7 million.

MA revenues grew 15.0% year over year to $241.4 million, buoyed by a strong increase in Research, Data and Analytics revenues (up 9.0%), Professional Services revenues (up 45.0%) and Enterprise Risk Solutions revenues (up 13.0%).

MA revenues increased 14.0% in the U.S., while outside the U.S. the same jumped 16.0% on a year-over-year basis in the reported quarter.

Operating expenses decreased 4.0% year over year to $434.2 million. As a result, operating income increased 19.0% year over year to $333.0 million in the first quarter. Operating margin was 46.4% compared with 41.5% in the year-ago quarter.  

Net income increased 15.7% year over year to $218.0 million in the last quarter.

Moody's exited the quarter with $2.04 billion in cash and cash equivalents and short-term investments. At quarter-end, Moody's had $2.10 billion in outstanding debt. Additionally, Moody's' board of directors approved a new $1.0 billion share buyback.

Guidance

Moody's expects 2014 revenues to grow in the high single-digit percent range. Operating expenses are projected to increase in the mid single-digit percent range. Operating margin is projected to be between 42.0% and 43.0%. Earnings for 2014 are expected to be in the range of $3.90 to $4.00 per share.

The Zacks Consensus Estimate is currently pegged at $3.94 for fiscal 2014.

For 2014, share repurchases are expected to be approximately $1.0 billion. Capital expenditure is projected to be approximately $90 million. Moody's expects approximately $100 million in depreciation and amortization expense. Free cash flow is expected to be $900.0 million.

MIS revenues for 2013 are expected to increase in the high single-digit percent range. U.S. MIS revenues are expected to increase in the low single-digit percent range, while non-U.S. MIS revenues are expected to increase in the low double-digit percent range.

Corporate finance revenues are projected to grow in the mid single-digit percent range. Revenues from structured finance are expected to grow in the low single-digit percent range, while revenues from financial institutions are expected to grow in the mid single-digit range.

Public, project and infrastructure finance revenues are expected to increase in the high-single-digit percent range.

MA revenues for 2014 are expected to increase in the low-teens percent range. In the U.S., revenues are expected to increase in the low double-digit percent range. Non-U.S. revenues are expected to increase in the high-teens percent range.

Revenues from research, data and analytics are projected to grow in the high single-digit percent range. Revenues from enterprise risk solutions are also expected to grow in the low-teens percent range. Professional services revenues are expected to grow in the low-forties percent range.

Our Recommendation

We believe that Moody's remains a solid franchise in rating debt instruments based on its diversified credit research business model and international growth opportunities. Moody's has plenty of growth opportunities from higher number of debt issuance, increasing disintermediation in Europe and Asia, strong potential in the analytics business and improving pricing trends.

Additionally, accretive acquisitions, improving liquidity, higher dividend payout and aggressive share buybacks are the other positives. However, regulatory concerns will remain an overhang on the stock.

Further, increasing competition from the likes of privately held Fitch, McGraw Hill Financial's MHFI Standard & Poor's division, Dun & Bradstreet DNB and Euronet EEFT is a major concern, going forward.

Currently, Moody's has a Zacks Rank #3 (Hold).