Moody's (MCO) Down 29.1% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Moody's (MCO). Shares have lost about 29.1% 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 Beats on Q4 Earnings as Issuance Volume Rises

Moody's reported fourth-quarter 2019 adjusted earnings of $2.00 per share, which outpaced the Zacks Consensus Estimate of $1.92. Also, the figure improved 23% from the year-ago quarter.

Results were largely driven by impressive global issuance volume and improving operating scenario, 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 $361 million or $1.88 per share, up from $254 million or $1.29 per share in the prior-year quarter.

In 2019, adjusted earnings per share of $8.29 beat the consensus estimate of $8.20 and increased 12% year over year. Net income (GAAP basis) was $1.43 billion or $7.42 per share, up from $1.32 billion or $6.74 per share in 2018.

Revenues & Costs Rise

Revenues of $1.23 billion beat the Zacks Consensus Estimate of $1.21 billion. Also, the top line grew 16% year over year. Foreign currency translation impact was negligible.

In 2019, revenues of $4.83 billion beat the consensus estimate of $4.80 billion and improved 9% year over year. Foreign currency translation unfavorably impacted revenues by 1%.

Total expenses were $729 million, up 7% year over year. The rise was mainly due to increase in compensation expenses, partially offset by beneficial impact of the restructuring plan and cost control initiatives. Notably, foreign currency translation impact was negligible.

Adjusted operating income of $559 million increased 17% year over year. Adjusted operating margin was 45.3%, up from 45%.

Quarterly Segment Performance

Moody’s Investors Service revenues grew 21% year over year to $720 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 bond issuances. Also, financial institutions’ revenues grew, primarily backed by rise in activity from infrequent U.S. insurance and non-U.S. banking issuers.

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

Moody’s Analytics revenues grew 10% year over year to $513 million, mainly driven by higher U.S. and international revenues. Foreign currency translation impact on the segment’s revenues was negligible.

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

Strong Balance Sheet

As of Dec 31, 2019, Moody’s had total cash, cash equivalents and short-term investments of $1.9 billion, up from $1.8 billion as of Dec 31, 2018. Further, it had $5.6 billion of outstanding debt and $1 billion in additional borrowing capacity under its revolving credit facility.

Share Repurchases Update

During the fourth quarter, the company repurchased 1.2 million shares for $263 million.

2020 Guidance

Moody’s expects adjusted earnings in the range of $9.10-$9.30 per share. On GAAP basis, earnings are expected within $8.60-$8.80 per share.

The company projects revenues to rise in the mid-single-digit percent range.

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

The company expects net interest expenses in the range of $180-200 million.

Adjusted operating margin is expected in the band of 48-49% and operating margin is likely to be 44%.

Moody’s expects cash flow from operations in the $1.8-$1.9 billion range and free cash flow to be about $1.7-$1.8 billion.

Share repurchases are estimated to be $1.3 billion.

Segment Outlook for 2020

MIS segment revenues are likely to increase in the mid-single-digit percent range. Adjusted operating margin is expected to be 58-59%.

Coming to the MA segment, Moody’s anticipates revenues to grow in the high-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 lot on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile 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 trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Moody's has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.