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Moody's (MCO) Up 3% Since Earnings Report: Can It Continue?

Zacks Equity Research

A month has gone by since the last earnings report for Moody's Corporation MCO. Shares have added about 3% in that time frame, outperforming the market.

Will the recent positive trend continue leading up to the stock's next earnings release, or is it due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Moody’s Q4 Earnings, Revenues Top Estimates

Moody's reported fourth-quarter 2016 adjusted earnings per share (EPS) of $1.23, beating the Zacks Consensus Estimate of $1.12. Also, the bottom line improved 13% from the year-ago quarter.

Results of the New York-based credit rating giant were primarily driven by a strong top-line performance.

Adjusted net income for the quarter was $237.3 million, increasing 9% from the prior-year period.

Including a settlement charge and certain other non-recurring items, Moody’s recorded a net loss of $428.6 million or $2.22 per share in the fourth-quarter 2016, compared to net income of $217.9 million or $1.09 in the prior-year quarter.

For full-year 2016, adjusted EPS of $4.81 outpaced the Zacks Consensus Estimate of $4.70. Also, it improved from the prior-year figure of $4.60. Adjusted net income for 2016 was 940.6 million, up from $934.9 million in 2015.

Performance in Detail

Revenues for 2016 came in at $3.6 billion, up 3% year over year. Also, the figure came almost in line with the Zacks Consensus Estimate.

For fourth-quarter 2016, Moody's posted revenues of $942.1 million, beating Zacks Consensus Estimate of $911.0 million. Also, revenues grew 9% year over year. The quarter witnessed higher domestic revenues as well as international revenues.

The company’s operating expense totaled $1.4 billion, significantly up from $532.8 million in the prior year quarter. Notably, the reported quarter included $863.8 million settlement charge as Moody's reached an agreement last month with the U.S. authorities to resolve claims tied with its credit ratings for residential mortgage-backed securities and collateralized debt obligations assigned during the financial crisis period.

Moody’s reported adjusted operating income of $423.6 million, increasing 17% year over year. Adjusted operating margin came in at 45.0%.

Segment Details

Segment wise, Moody’s Investors Service (MIS) revenues increased 12% year over year to $607.8 million driven by growth in U.S. revenues as well as international revenues.

Higher levels of U.S. and European rated bank loan issuance along with higher speculative grade bond rating revenue led to growth in global corporate finance revenues. Also, global structured finance revenues witnessed growth mainly driven by increased deal activity in U.S. CLOs and CMBS and in European RMBS and CLOs.

Further driven by non-U.S. infrastructure issuance and U.S. public finance issuance, the company recorded increase in global public, project and infrastructure finance revenue. However, global financial institutions' revenues declined due to lower European bank issuance.

Moody’s Analytics (MA) revenues grew 4% year over year to $334.3 million, mainly due to higher U.S. revenues, partially offset by lower international revenues. The segment recorded growth in research, data and analytics (RD&A) revenues and Enterprise Risk Solutions (ERS) revenues (up 10% year over year to $101.5 million). However, global professional services revenues declined year over year.

Balance Sheet

As of Dec 31, 2016, Moody’s had total cash, cash equivalents and short-term investments of $2.2 billion, almost stable with prior year end. Free cash flow for 2016 increased 4% year over year to $1.1 billion.

During the reported quarter, the company repurchased 0.6 million shares for $59.9 million.

Outlook

For 2017, Moody’s anticipates revenue to increase in the mid-single-digit percent range. Operating expense is projected to decline in the range of 25–30%. The company noted that excluding the 2016 settlement and restructuring charges, adjusted operating expense is estimated to grow in the low-single-digit percent range.

On a constant dollar basis, the revenue growth rate is expected to be about 120 basis points (bps) higher and the adjusted operating expense growth rate projected to be around 170 bps higher.

MIS revenue in 2017 is likely to increase in the mid-single-digit percent range. The company expects both U.S. and non-U.S. revenues to grow in the mid-single-digit percent range. On a constant dollar basis, the revenue growth rate for MIS would be around 100 bps higher. Also, corporate finance revenue, structured finance revenue and financial institutions revenue are each anticipated to grow in the mid-single-digit percent range. Public, project and infrastructure finance revenue is projected to increase in the low-single-digit percent range.

Regarding MA, Moody’s anticipates 2017 revenue to grow in the mid-single-digit percent range. U.S. revenue is expected to increase in the low-single-digit percent range while non-U.S. revenue is estimated to be up in the high-single-digit percent range. On a constant dollar basis, the revenue growth rate for MA would be about 180 bps higher.

Research, data and analytics revenue is expected to increase in the high-single-digit percent range. Enterprise risk solutions revenue is likely to grow in the mid-single-digit percent range while professional services revenue is anticipated to increase in the low-single-digit percent range.

Adjusted operating margin of Moody’s is projected to be approximately 46%.

The company expects 2017 EPS in the range of $5.15–$5.30. The guidance includes an estimated benefit of 15 cents from an accounting change tied with equity compensation.

Moody’s expects cash flow from operations to be about $600 million and free cash flow of about $500 million. Share repurchases are estimated to be $500 million. Capital expenditures are likely to be about $100 million while depreciation and amortization expense is estimated to be around $135 million.

How Have Estimates Been Moving Since Then?

Following the release, investors have witnessed an upward trend in fresh estimates. There have been five revisions higher for the current quarter In the past month, the consensus estimate has shifted by 6.2% due to these changes.

Moody's Corporation Price and Consensus

 

Moody's Corporation Price and Consensus | Moody's Corporation Quote

VGM Scores

At this time, Moody's stock has a nice score of 'B' on both growth and momentum front. 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 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.

Zacks' style scores indicate that the company's stock is suitable for growth and momentum investors.

Outlook

Estimates have been trending upward for the stock. The magnitude of these revisions also looks promising.  Notably, the stock has a Zacks Rank #2 (Buy). We are expecting an above average return from the stock in the next few months.


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