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Moody's (MCO) Beats on Q3 Earnings, Lifts Revenue Guidance

Zacks Equity Research

Moody's MCO reported third-quarter 2019 adjusted earnings of $2.15 per share, which handily outpaced the Zacks Consensus Estimate of $1.99. Also, the figure improved 27% from the year-ago quarter.

Results were largely driven by impressive global issuance volume and opportunistic acquisitions closed over the past year, which led to rise in revenues. However, higher operating expenses posed an undermining factor.   

After taking into consideration certain non-recurring items, net income was $382.4 million or $1.99 per share, up from $312 million or $1.59 per share in the prior-year quarter.

Revenues & Costs Rise

Revenues of $1.24 billion beat the Zacks Consensus Estimate of $1.18 billion. Also, the top line grew 15% year over year. Foreign currency translation unfavorably impacted revenues by 2%.

Total expenses were $691.7 million, up 13% year over year. The rise was mainly due to increase in compensation expenses and operating expenses attributable to deals closed within the past year. These were partially offset by beneficial impacts of the restructuring plan and cost control initiatives. Notably, foreign currency translation favorably impacted operating expenses by 2%.

Adjusted operating income of $613.9 million increased 19% year over year. Adjusted operating margin was 49.5%, up from 47.6%.

Segment Performance

Moody’s Investors Service revenues grew 16% year over year to $747.6 million attributable to rise in issuance activity. Foreign currency translation unfavorably impacted the segment’s revenues by 1%.

Corporate finance revenues increased driven by robust global fixed-rate bond issuance. Also, financial institutions’ revenues grew, primarily backed by rise in activity from international infrequent bank issuers.

Further, global public, project and infrastructure finance revenues increased, reflecting strong U.S. public finance issuance and opportunistic infrastructure finance issuance in Latin America and Canada. However, structured finance revenues witnessed a fall, mainly due to lower global collateralized loan obligation activity.

Moody’s Analytics revenues grew 13% year over year to $493.9 million, mainly driven by higher U.S. and international revenues. Notably, foreign currency translation unfavorably impacted the segment’s revenues by 2%.

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

Strong Balance Sheet

As of Sep 30, 2019, Moody’s had total cash, cash equivalents and short-term investments of $1.3 billion, down from $1.8 billion as of Dec 31, 2018 level. Further, it had $5.2 billion of outstanding debt and $1 billion in additional borrowing capacity under its revolving credit facility.

Share Repurchases Update

During the third quarter, the company repurchased 0.5 million shares for $113 million.

2019 Guidance

Driven by top-line growth and prudent expense management, Moody’s expects adjusted earnings in the range of $8.05-$8.20 per share, up from prior outlook of $7.95-$8.15. Notably, the Zacks Consensus Estimate for 2019 is $8.06, which is near the lower end of the adjusted earnings guidance.

On GAAP basis, earnings are expected to be $7.20-$7.35 per share, up from the prior guidance of $7.15-$7.35.

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

Operating expenses are expected to increase in the high-single-digit percent range.

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, steadily increasing operating expenses will hurt its financials to some extent.

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

Capitala Finance Corp. CPTA, LendingClub Corporation LC and FS KKR Capital Corp. FSK are scheduled to announce results on Nov 4, Nov 5 and Nov 7, respectively.

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