It has been about a month since the last earnings report for Moody's (MCO). Shares have lost about 4.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Moody's due for a breakout? 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 drivers.
Moody's Q1 Earnings & Revenues Beat, Expenses Rise
Moody's reported first-quarter 2019 adjusted earnings of $2.07 per share, which handily outpaced the Zacks Consensus Estimate of $1.88. Also, the figure improved 2% from the year-ago quarter.
Results were largely driven by impressive Moody’s Analytics segment performance and a strong balance sheet position. As expected, weak global issuance volume hurt the results and also adversely impacted performance of Moody’s Investors Service segment. Also, operating expenses witnessed a rise.
After taking into consideration certain non-recurring items, Moody’s net income was $372.9 million or $1.93 per share compared with net income of $372.9 million or $1.92 per share in the prior-year quarter.
Revenues & Costs Rise
Revenues of $1.14 billion beat the Zacks Consensus Estimate of $1.13 billion. Also, the top line inched up 1% year over year. Foreign currency translation unfavorably impacted the top line by 2%.
Total expenses were $680.4 million, up 7% year over year. The increase was mainly due to additional compensation expenses for hiring activity and merit increases in 2018, operating expenses attributable to Reis and Omega Performance deals, and restructuring charges. Notably, foreign currency translation favorably impacted operating expenses by 3%.
Adjusted operating income of $461.7 million decreased 6% year over year.
Adjusted operating margin came in at 45.4%, down from 48.0%.
Moody’s Investors Service revenues decreased 7% year over year to $670.1 million due to lower issuance activity. Foreign currency translation unfavorably impacted the top line by 2%.
Corporate finance revenues declined owing to fall in global bank loan issuance, partly offset by increased U.S. and EMEA investment grade bond activity. Also, structured finance revenues witnessed a fall, mainly due to lower U.S. and EMEA collateralized loan obligation refinancing activity.
Further, the company recorded a decrease in global public, project and infrastructure finance revenues due to start to the year in non-U.S. infrastructure finance issuance, partly offset by higher U.S. municipal issuance.
However, financial institutions’ revenues improved primarily driven by rise in non-U.S. revenues.
Moody’s Analytics revenues grew 16% year over year to $472 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 Mar 31, 2019, Moody’s had total cash, cash equivalents and short-term investments of $1.3 billion, up 28% from Dec 31, 2018 level. Further, it had $5.5 billion of outstanding debt and $680 million in additional borrowing capacity under its revolving credit facility.
Share Repurchases Update
During the reported quarter, the company repurchased 0.5 million shares for $73.2 million.
Moody’s expects its adjusted earnings to be in the range of $7.85-8.10 per share. On a GAAP basis, earnings are expected to be in the $7.30-$7.55 per share range.
The company’s cost saving initiative (announced in October 2018), which is expected to result in an aggregate charge of $70-$80 million through June 2019-end, is projected to lead to annualized pre-tax savings of $40-$50 million, going forward.
The company expects net interest expenses to be nearly $200-$225 million.
Moody’s anticipates both revenues and operating expenses to rise in the mid-single-digit percent range.
Adjusted operating margin is expected to be approximately 48% and operating margin is likely to be nearly 43%.
Moody’s expects cash flow from operations to be about $1.7-$1.8 billion and free cash flow to be about $1.6-$1.7 billion.
Share repurchases are estimated to be $1 billion.
The effective tax rate is expected to be 21-22%.
Segment Outlook for 2019
MIS segment revenues are likely to increase in the low-single-digit percent range. Also, the company expects U.S. revenues to increase in the low-single-digit percent range. However, non-U.S. revenues are projected to remain flat. Adjusted operating margin is expected to be 58%.
Regarding the MA segment, Moody’s anticipates revenues to grow in the low-double-digit percent range. U.S. revenues are expected to increase in the mid-teens percent range and non-U.S. revenues are estimated to increase in the high-single-digit percent range. Adjusted operating margin is expected to be 29-30%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -5.67% due to these changes.
Currently, Moody's has a nice Growth Score of B, however its Momentum Score is doing a bit better with an A. However, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Moody's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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