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Moody's (MCO) Beats on Q2 Earnings & Revenues, Ups Cost View

Zacks Equity Research

Moody's MCO reported second-quarter 2019 adjusted earnings of $2.07 per share, which handily outpaced the Zacks Consensus Estimate of $1.98. Also, the figure improved 1% from the year-ago quarter.

Results were largely driven by impressive Moody’s Analytics segment performance and a strong balance sheet position. As expected, soft global issuance volume hurt the results and also adversely impacted performance of Moody’s Investors Service segment. Further, operating expenses witnessed a rise.

After taking into consideration certain non-recurring items, net income was $312 million or $1.62 per share, down from $377.9 million or $1.94 per share in the prior-year quarter.

Revenues & Costs Rise

Revenues of $1.21 billion beat the Zacks Consensus Estimate of $1.18 billion. Also, the top line grew 3% year over year. Foreign currency translation unfavorably impacted the top line by 2%.

Total expenses were $730.1 million, up 14% year over year. The rise was mainly due to additional compensation expenses for hiring activity and merit increases, charges related to the proposed divestiture of Moody’s Analytics Knowledge Services and operating expenses attributable to Reis and Omega Performance deals. Notably, foreign currency translation favorably impacted operating expenses by 2%.

Adjusted operating income of $599 million increased 2% year over year.

Adjusted operating margin was 49.4%, down marginally from 49.7%.

Segment Performance

Moody’s Investors Service revenues decreased 2% year over year to $738.4 million due to lower issuance activity.

Corporate finance revenues declined owing to a fall in U.S. floating-rate bank loan activity, partly offset by increased global fixed-rate bond issuance. Also, structured finance revenues witnessed a fall, mainly due to lower global collateralized loan obligation activity.

Nonetheless, the company recorded stable global public, project and infrastructure finance revenues. Further, financial institutions’ revenues improved, primarily driven by strong contribution from EMEA banking issuers.

Moody’s Analytics revenues grew 12% year over year to $475.2 million, mainly driven by higher U.S. and international revenues. Notably, foreign currency translation unfavorably impacted the segment’s revenues by 3%.

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

Strong Balance Sheet

As of Jun 30, 2019, Moody’s had total cash, cash equivalents and short-term investments of $1.2 billion, down 29% from Dec 31, 2018 level. Further, it had $5.4 billion of outstanding debt and $870 million in additional borrowing capacity under its revolving credit facility.

Share Repurchases Update

During the reported quarter, the company repurchased 0.8 million shares.

2019 Guidance

Moody’s now expects adjusted earnings to be in the range of $7.95-$8.15 per share, up from the prior view of $7.85-$8.10. On GAAP basis, earnings are expected to be $7.15-$7.35 per share, down from the prior guidance of $7.30-$7.55.Notably, the Zacks Consensus Estimate for 2019 is $7.94, which is within the adjusted earnings guidance.

Moody’s projects revenues to rise in the mid-single-digit percent range, while operating expenses are expected to increase in the high-single-digit percent range (up from the previous outlook of increase in the mid-single-digit percent range).

Effective tax rate is anticipated to be 21-22%.

Our Take

Though the company remains well positioned for growth on the back of strong market position, strength in its diverse operations and strategic acquisitions, weakness in global debt issuances will hurt its financials.

Moody's Corporation Price, Consensus and EPS Surprise

 

Moody's Corporation Price, Consensus and EPS Surprise

Moody's Corporation price-consensus-eps-surprise-chart | Moody's Corporation Quote

Currently, Moody’s carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings Release Dates of Other Finance Stocks

Hercules Capital, Inc. HTGC, Capitala Finance Corp. CPTA and FS KKR Capital Corp. FSK are scheduled to announce results on Aug 1, Aug 5 and Aug 7, respectively.

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