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Moody's (MCO) Q4 Earnings & Revenues Lag, Expenses Down

Zacks Equity Research

Moody's MCO reported fourth-quarter 2018 adjusted earnings of $1.63 per share, which missed the Zacks Consensus Estimate of $1.71. However, the figure improved 8% from the year-ago quarter.

Weak global bond issuance volume hurt the results and also adversely impacted performance of Moody’s Investors Service segment. However, decline in operating expenses and decent Moody’s Analytics segment performance were the tailwinds.

After taking into consideration certain non-recurring items, Moody’s net income was $252.7 million or $1.29 per share. This compared favorably with net income of $28.5 million or 13 cents per share in the prior-year quarter.

For 2018, adjusted earnings per share of $7.39 lagged the consensus estimate of $7.48. However, it was up 22% year over year. After considering non-recurring items, net income was $1.32 billion, up 31%.

Revenues & Costs Down

Quarterly revenues of $1.06 billion lagged the Zacks Consensus Estimate of $1.15 billion. Also, the top line decreased 9% year over year. Foreign currency translation unfavorably impacted the top line by 1%.

For 2018, revenues came in at $4.44 billion, which missed the Zacks Consensus Estimate of $4.53 billion. Nonetheless, it increased 6% from the prior year. Notably, foreign currency translation favorably impacted revenues by 1%.

Total expenses were $683.5 million, down 2% year over year. Lower accruals for 2018 incentive compensation awards were partially offset by restructuring charges. Notably, foreign currency translation favorably impacted operating expenses by 2%.

Adjusted operating income of $477.8 million decreased 8% year over year.

Adjusted operating margin came in at 45.1%, up from 44.7% a year ago.

Quarterly Segment Performance

Moody’s Investors Service revenues decreased 18% year over year to $595.4 million due to lower global debt issuance activity. Foreign currency translation unfavorably impacted the top line by 1%.

Corporate finance revenues declined owing to fall in issuance activity across all asset classes, with particular weakness in U.S. and EMEA speculative grade bonds. Also, structured finance revenues witnessed a fall, mainly due to lower U.S. commercial real estate issuance.

Further, the company recorded a decrease in global public, project and infrastructure finance revenues due to reduced U.S. public finance, and U.S. and EMEA infrastructure finance issuance.

Moreover, financial institutions’ revenues fell primarily due to a decline in global banking and U.S. insurance issuance.

Moody’s Analytics revenues grew 5% year over year to $464.7 million, mainly driven by higher U.S. revenues as well as international revenues. Notably, foreign currency translation unfavorably impacted the segment’s revenues by 2%.

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

Strong Balance Sheet

As of Dec 31, 2018, Moody’s had total cash, cash equivalents and short-term investments of $1.82 billion, up 54% from Dec 31, 2017 level. Further, it had $5.7 billion of outstanding debt and $1 billion of additional borrowing capacity under its revolving credit facility.

Share Repurchases Update

During the reported quarter, the company repurchased 0.3 million shares for $55.4 million.

Further, Moody’s announced a $500 million accelerated share repurchase program, which is expected to be completed during the second quarter of 2019.

Dividend Hike

Concurrently, Moody’s announced a quarterly cash dividend of 50 cents per share, representing 14% hike from the prior payout. The dividend will be paid on Mar 18 to shareholders on record as of Feb 25.

2019 Guidance

Moody’s expects its adjusted earnings to be in the range of $7.85-$8.10 per share and GAAP earnings to be in the range of $7.30-$7.55 per share. Notably, the Zacks Consensus Estimate for 2019 is $7.91, which is within the adjusted earnings guidance.

Moody’s anticipates revenues and operating expenses to rise in the mid-single-digit percent range.

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

Our Take

Moody’s performance was dismal in the quarter. 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 Quote

Currently, Moody’s carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings Schedule of Other Stocks

LendingClub Corp. LC, Hercules Capital, Inc. HTGC and Garrison Capital Inc. GARS are slated to announce results on Feb 19, Feb 21 and Mar 5, respectively.

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