Why Is Moody's (MCO) Up 3.7% Since Last Earnings Report?
Zacks Equity Research
5 min read
It has been about a month since the last earnings report for Moody's (MCO). Shares have added about 3.7% in that time frame, underperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Moody's 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 catalysts.
Moody's Beats on Q2 Earnings, Revenues Up Y/Y
Moody's reported second-quarter 2020 adjusted earnings of $2.81 per share, which outpaced the Zacks Consensus Estimate of $2.26. Also, the figure improved 36% from the year-ago quarter.
Revenue growth on the back of impressive global bond issuance volume largely drove the results. Further, operating expenses declined slightly.
After taking into consideration certain non-recurring items, net income was $509 million or $2.69 per share, up from $311 million or $1.62 per share in the prior-year quarter.
Revenues Improve, Costs Down
Revenues of $1.44 billion beat the Zacks Consensus Estimate of $1.27 billion. Also, the top line grew 18% year over year. Foreign currency translation unfavorably impacted the top line by 1%.
Total expenses were $725 million, down 1% year over year. The fall was driven by prudent expense management. Also, foreign currency translation favorably impacted operating expenses by 1%.
Adjusted operating income of $766 million increased 28% year over year. Adjusted operating margin was 53.4%, up from 49.3% a year ago.
Impressive Segment Performance
Moody’s Investors Service revenues grew 27% year over year to $938 million, attributable to rise in issuance activity. Foreign currency translation unfavorably impacted the segment’s revenues by 1%.
Corporate finance revenues increased from the prior-year period, driven by robust investment grade bond issuances. Also, financial institutions’ revenues grew year over year, primarily backed by a rise in activities from U.S. banks and insurance companies.
Further, public, project and infrastructure finance revenues increased from the year-ago level, reflecting strong U.S. public finance issuance, as well as solid infrastructure issuance. However, structured finance revenues fell from the prior-year figure, mainly due to lower global collateralized loan obligation activity and weakness within U.S. CMBS.
Moody’s Analytics revenues grew 5% year over year to $497 million. Foreign currency translation unfavorably impacted the segment’s revenues by 2%.
The segment recorded growth in research, data and analytics revenues, as well as Enterprise Risk Solutions revenues.
Strong Balance Sheet
As of Jun 30, 2020, Moody’s had total cash, cash equivalents and short-term investments of $2.2 billion, up from $1.9 billion on Dec 31, 2019. Further, it had $6.3 billion of outstanding debt and $1 billion in additional borrowing capacity under the revolving credit facility.
2020 Guidance Raised
Given impressive second-quarter results, Moody’s has raised its 2020 earnings guidance. The company now expects adjusted earnings in the range of $8.80-$9.20 per share (up from the prior expectation of $7.80-$8.40). On a GAAP basis, earnings are expected within $8.15-$8.55 per share, up from the earlier guided range of $7.25-$7.85.
Moody’s now projects revenues to increase in the low-single-digit percent range versus the prior guidance of revenue decline in the band of mid-single-digit percent.
Operating expenses are expected to remain relatively stable year over year versus the prior guidance of a decrease in the mid-single-digit percent range.
The company plans to undertake a restructuring program in second-half 2020, with aim of rationalizing and exiting certain real estate leases. This is expected to result in total pre-tax charges of $25-$35 million and annualized savings of $5-$6 million.
The company expects net interest expenses in the range of $180-200 million.
Adjusted operating margin is expected in the band of 48-49% (versus the prior guided range of 46-48%) and operating margin is likely to be within 43-44% (reflecting a rise from earlier expectation of 41-43%).
Moody’s expects cash flow from operations in the $1.6-$1.8 billion band (up from the $1.3-$1.5 billion range) and free cash flow within $1.5-$1.7 billion (higher than $1.2-$1.4 billion projected earlier).
Effective tax rate is likely to be in the 19.5-21.5% range.
Segment Outlook for 2020
The MIS segment revenues are likely to grow in the low-single-digit percent range versus prior view of a decrease in the high-single-digit percent range. The key reason behind the improved guidance is the assumption that the segment’s global rated issuance will increase in the low-double-digit percent range.
Adjusted operating margin is expected to be approximately 58%, higher than the prior guided range of 55-57%.
Coming to the MA segment, Moody’s anticipates revenues to grow in the mid-single-digit percent range. Adjusted operating margin is expected to be 30%.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates.
VGM Scores
At this time, Moody's has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. However, the stock was allocated a grade of F on the value side, putting it in the lowest quintile 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.
Outlook
Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. 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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