Impressive 1Q for Moody's

Zacks

Moody’s Corp. (MCO) reported first quarter 2012 earnings of 76 cents per share, which surpassed the Zacks Consensus Estimate by seven cents. Earnings increased 13.4% year over year, primarily driven by strong top-line growth.

Quarter Details

Revenue climbed 12.1% year over year to $646.8 million and exceeded the Zacks Consensus Estimate of $621.0 million. The better-than-expected result was driven by strong performance from both Moody’s Investors Service (:MIS) and Moody's Analytics (MA) division.

Region-wise, revenue from the U.S. increased 14.0% year over year to $344.0 million, while international revenues increased 10.0% to $302.8 million in the quarter.

Segment-wise, Moody’s Investors Service (:MIS) revenues climbed 9.7% year over year to $452.7 million. MIS revenues in the U.S. surged 13.0%, while revenues outside the U.S. rose 6.0% from the year-ago quarter.

Within the MIS segment, Global Corporate Finance revenues increased 10.0% year over year to $200.5 million, while Global Structured Finance revenues jumped 5.0% year over year to $94.3 million. Global Financial Institutions’ revenue perked up 2.0% year over year to $78.8 million. Global public, project and infrastructure finance revenues leaped 23.0% year over year to $79.1 million.

Moody's Analytics (MA) revenues grew 18.0% year over year to $194.1 million, buoyed by an increase in Research, Data and Analytics revenues (up 9.0%), Professional services revenues (up 126%) and enterprise risk solutions revenues (up 11.0%). MA revenues increased 19.0% in the US, while outside the U.S, it rose 17.0% on a year-over-year basis in the reported quarter.

Operating income increased 7.6% year over year to $269.0 million in the first quarter. However, operating margin declined 170 basis points (bps) to 41.6%, primarily due to higher operating expenses (up 16.0%). Net income increased 11.6% year over year to $173.5 million in the reported quarter.

Moody's exited the quarter with $828.0 million in cash and cash equivalents and short-term investments compared with $774.8 million in the previous quarter. At quarter end, Moody’s had $1.24 billion in outstanding debt and had additional debt capacity of $1.0 billion under its revolving credit facility.

Guidance

Moody’s expects diluted earnings per share in the higher end of management’s guided range of $2.62 to $2.72 for fiscal 2012. For fiscal 2012, Moody’s expects revenues to increase in the low-double-digit percent range. However, expenses are also projected to increase in the low-double-digit percent range. Operating margin is projected to be approximately 39%.

Segment wise, global MIS revenue is expected to increase in the mid- to high-single-digit percent range for fiscal 2012. Domestic MIS revenue is estimated to increase in the low-double-digit percent range, while overseas revenue is expected to increase in the low-single-digit range. MA revenue will likely increase in the in the high-teens percent range both inside and outside the U.S.

Recommendation

Moody’s first quarter results primarily reflect an improving global economy, particularly the US corporate finance market, driven by strong investment grade and solid speculative grade bond issuance activity. We believe that Moody’s remains a solid franchise in rating debt instruments based on its diversified credit research business model and international growth.

However, increasing regulatory complications and cut-throat competition from Dun & Bradstreet Corp (DNB) and privately-held Fitch Ratings Inc. and Standard & Poor’s Financial Services LLC may hurt its profitability going forward.

We remain Neutral on a long-term basis (6-12 months). Currently, Moody’s has a Zacks #3 Rank, which implies a Hold rating in the short term (1-3 months).

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