Moody’s Corp. (MCO) reported earnings of 83 cents per share in the third quarter of 2013, which jumped 10.7% from the year-ago quarter and beat the Zacks Consensus Estimate by a penny.
Quarter Details
Revenues increased 2.0% year over year to $705.5 million, which missed the Zacks Consensus Estimate of $717.0 million. The year-over-year growth was driven by strong performance from both Moody’s Investors Service (MIS) and Moody's Analytics (MA).
Domestic revenues increased 3.0% year over year to $391.0 million in the reported quarter. International revenues increased 1.0% year over year to $314.5 million in the quarter.
Segment wise, Moody’s Investors Service (MIS) revenues increased 1.0% year over year to $478.1 million. MIS revenues in the U.S. remained flat on a year-over-year basis, while revenues outside the U.S. increased 2.0% from the year-ago quarter.
Within the MIS segment, Global Corporate Finance revenues increased 6.0% year over year to $233.0 million, reflecting increased bank loan issuance in the U.S. as well as in Europe, Middle East and Africa.
Global Structured Finance revenues decreased 10.0% year over year to $83.5 million, primarily due to weaker issuance volume in the overseas markets.
Global Financial Institutions revenues decreased 5.0% year over year to $78.9 million in the quarter, due to lower issuance activity from smaller banking institutions. Global public, project and infrastructure finance revenues were up 7.0% year over year to $82.7 million. The growth was primarily due to gains in infrastructure finance.
MA revenues grew 6.0% year over year to $227.4 million, buoyed by a strong increase in Research, Data and Analytics revenues (up 8.0%), Professional Services revenues (up 10.0%) and Enterprise Risk Solutions revenues (up 1.0%).
MA revenues increased 14.0% in the U.S., while outside the U.S. it remained flat on a year-over-year basis in the reported quarter.
Operating expenses decreased 1.0% year over year to $414.0 million due to lower incentive compensation.
As a result, operating income increased 8.0% year over year to $291.5 million in the third quarter. Operating margin was 41.3% compared with 39.2% in the year-ago quarter.
Net income remained flat on a year-over-year basis at $183.9 million in the reported quarter.
Moody's exited the quarter with $2.04 billion in cash and cash equivalents and short-term investments. At quarter end, Moody’s had $2.10 billion in outstanding debt. The company bought back 6.2 million shares for $397.2 million during the quarter.
Guidance
Moody’s expects 2013 revenues to grow in the high single-digit percent range. Operating expenses are projected to increase in the mid single-digit percent range. Operating margin is projected to be between 41% and 42%. Earnings for 2013 are expected to be in the range of $3.51 to $3.57 (prior outlook $3.49 to $3.59) per share.
For 2013, share repurchases are expected to be approximately $1.0 billion. Capital expenditure is projected to be approximately $50 million. Moody’s expects approximately $100 million in depreciation and amortization expense. Free cash flow is expected to be $850.0 million.
MIS revenues for 2013 are expected to increase in the high single-digit percent range. U.S. MIS revenues are expected to increase in the high single-digit percent range, while non-U.S. MIS revenues are expected to increase in mid-single digit percent range (down from high single-digit percent range).
Corporate finance revenues are projected to grow in the mid teens percent range (low teens percent range). Revenues from structured finance are now expected to decline in the low-single-digit percent range, while revenues from financial institutions are expected to grow in the low single-digit range. Public, project and infrastructure finance revenues are expected to increase in the mid-single digit range (down from low double-digit percent range).
MA revenues for 2013 are expected to increase in the high single-digit percent range. In the U.S., revenues are expected to increase in the low double-digit percent range. Non-U.S. revenues are expected to increase in the mid single-digit percent range.
Revenues from research, data and analytics are projected to grow in the high single-digit percent range. Revenues from enterprise risk solutions are also expected to grow in the high single digit range (down from low double-digit percent range). Professional services revenues are expected to grow in the mid single-digit range (down from high single-digit percent range).
Our Recommendation
We believe that Moody’s remains a solid franchise in rating debt instruments based on its diversified credit research business model and international growth opportunities. However, the company’s modest third quarter result and cautious revenue projections suggest sluggish macroeconomic environment in our view.
Moreover, increasing competition from the likes of privately held Fitch, McGraw Hill Financial’s (MHFI) Standard & Poor's division, Dun & Bradstreet (DNB) and Euronet (EEFT) is a major concern going forward.
Currently, Moody’s has a Zacks Rank #3 (Hold).
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