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Why Is MSCI (MSCI) Up 12.7% Since Last Earnings Report?

A month has gone by since the last earnings report for MSCI (MSCI). Shares have added about 12.7% in that time frame, outperforming the S&P 500.

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

MSCI Q3 Earnings Beat Estimates, Recurring Subscriptions Up

MSCI’s third-quarter 2022 adjusted earnings of $2.85 per share beat the Zacks Consensus Estimate by 3.26% and increased 12.6% from the year-ago quarter.

Operating revenues improved 8.4% year over year to $560.6 million but lagged the consensus mark by 0.77%.

Recurring subscriptions accounted for 75% of revenues and increased 17.5% year over year to $420.2 million.

Asset-based fees accounted for 22.4% of revenues but declined 11.4% year over year to $125.6 million. Non-recurring revenues accounted for 2.6% of revenues but decreased 16.4% year over year to $14.8 million.

Quarter Details

In the third quarter, Index operating revenues improved 0.2% year over year to $322.2 million, driven by higher recurring subscription revenues.

Growth in higher recurring subscription revenues was driven by growth from market-cap-weighted index products and strong growth from factor, ESG and climate index products.

Asset-based fees’ decline was primarily driven by a decrease in revenues from ETFs linked to MSCI equity indexes as a result of declining average AUM and average basis point fees.

Analytics operating revenues improved 6.3% year over year to $144.9 million, driven by higher recurring subscription revenues from both Multi-Asset Class and Equity Analytics products.

ESG and Climate segment’s operating revenues surged 31.8% from the year-ago quarter to $57.6 million, primarily driven by strong growth from recurring subscriptions related to Ratings and Climate products.

Other revenues, which primarily contain the Real Estate operating segment, were $36 million, up 130% year over year.

Adjusted EBITDA increased 11.2% year over year to $341 million in the reported quarter. Adjusted EBITDA margin expanded 150 basis points (bps) on a year-over-year basis to 60.8%.

Total operating expenses increased 6% on a year-over-year basis to $251.1 million. Adjusted EBITDA expenses were $219.7 million, up 4.4%, primarily reflecting higher non-compensation costs related to information technology costs and professional fees.

Operating income improved 10.5% from the year-ago quarter to $309.5 million. Moreover, the operating margin expanded 100 bps on a year-over-year basis to 55.2%.

Balance Sheet & Cash Flow

Total cash and cash equivalents, as of Sep 30, 2022, were $867.1 million compared with $842.3 million as of Jun 30, 2022.

Total debt was $4.51 billion as of Sep 30 compared with $4.6 billion as of Jun 30. The total debt-to-adjusted-EBITDA ratio (based on trailing twelve-month-adjusted EBITDA) was 3.4 times, within the management’s target range of 3-3.5 times.

Free cash flow was $305.1 million, up 51.7% year over year.

MSCI bought shares worth $165 million during the reported quarter. Notably, $1.3 billion is outstanding under MSCI’s share-repurchase authorization as of Oct 24, 2022. The company paid out dividends worth $100.7 million in the third quarter.

Guidance

For 2022, MSCI expects total operating expenses of $1.030-$1.060 million. Adjusted EBITDA expenses are expected between $910 million and $940 million.

Interest expenses are expected to be roughly $172 million.

Capex is expected to be $65-$75 million.

Net cash provided by operating activities and free cash flow is expected to be $1.100-$1.140 billion and $1.025-$1.075 billion, respectively.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, MSCI has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, 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 D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, MSCI has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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