We expect Moody’s, Inc. (MCO) to beat earnings expectations when it reports second-quarter fiscal 2014 results on Jul 25. Last quarter, the company posted an 11.11% positive surprise. We note that Moody’s has outperformed the Zacks Consensus Estimate in the preceding four quarters with an average positive surprise of 8.15%.
Why a Likely Positive Surprise?
Our proven model shows that Moody’s is likely to beat earnings because it has the right combination of two key ingredients.
Positive Zacks ESP: Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +6.06%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank #3 (Hold): Note that stocks with Zacks Ranks of #1, 2 and 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
The combination of Moody’s’ Zacks Rank #3 and +6.06% ESP makes us very confident in looking for a positive earnings beat this quarter.
What is Driving the Better-than-Expected Earnings?
Moody’s reported strong first-quarter 2014 results beating the Zacks Consensus Estimate for both earnings and revenues. The company also provided optimistic guidance for the full year.
We believe that Moody’s has plenty of growth opportunities from higher number of debt issuance, increasing disintermediation in Europe and Asia, strong potential in the professional and analytics business and improving pricing trends. Additionally, accretive acquisitions, improving liquidity, higher dividend payout and aggressive share buybacks are the other positives.
However, regulatory concerns will remain an overhang on the stock. Moreover, sluggish growth in China, lack of visibility in the Fed’s near-term policy and sluggish macro-economy are the primary headwinds.
Other Stocks to Consider
Moody’s is not the only firm looking up this earnings season. We also see likely earnings beats coming from these three industry peers:
Silicon Motion (SIMO), with an Earnings ESP of +33.33% and a Zacks Rank #1 (Strong Buy).
Synaptics (SYNA), with an Earnings ESP of +0.81% and a Zacks Rank #1.
F5 Networks (FFIV), with an Earnings ESP of +3.81% and a Zacks Rank #2 (Buy).
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