Moody’s Corp. (MCO) reported earnings of 97 cents per share in the third quarter of 2014, which was up 17% from the year-ago quarter and beat the Zacks Consensus Estimate by 6 cents. This year-over-year increase in earnings was primarily attributable to robust revenue growth exhibited by the company in the quarter.
Quarter Details
Revenues increased 16% year over year to $816.1 million, which beat the Zacks Consensus Estimate of $790 million. The year-over-year growth was driven by strong performance from Moody's Analytics (MA).
U.S. revenues of $449.1 million and non-U.S. revenues of $367.0 million increased 15% and 17%, respectively, on a year-over-year basis in the reported quarter.
Segment-wise, Moody’s Investors Service (MIS) revenues increased 14% year over year to $543.1 million. MIS revenues in the U.S. increased 13% on a year over year basis. Revenues outside the U.S. increased 14% from the year-ago quarter.
Within the MIS segment, Global Corporate Finance revenues increased 12% year over year to $260.7 million, reflecting a favorable mix of bond and bank loan issuance in the quarter, as well as additional monitoring revenues associated with new ratings customers. Global Structured Finance revenues increased 22% year over year to $102.1 million.
Global Financial Institutions revenues increased 16% year over year to $91.8 million in the quarter. Global public, project and infrastructure finance revenues were up 7% year over year to $88.5 million.
MA revenues grew 20% year over year to $273 million, buoyed by strong increase in Research, Data and Analytics revenues (up 10%), Professional Services revenues (up 54%) and Enterprise Risk Solutions revenues (up 26%).
MA revenues increased 19% in the U.S., while outside the U.S., the same jumped 21% on a year-over-year basis in the reported quarter.
Operating expenses increased 13% year over year to $466.4 million. The year-over-year growth was primarily due to higher compensation and real estate costs attributable to increased headcount, increased incentive compensation and acquisition-related costs.
Operating income increased 20% year over year to $349.7 million in the third quarter. Operating margin was 42.9% compared with 41.3% in the year-ago quarter.
Net income increased 17% year over year to $215.2 million in the reported quarter.
Moody's exited the quarter with $2.1 billion in cash and cash equivalents and short-term investments. At quarter-end, Moody’s had $2.5 billion in outstanding debt and $1.0 billion of additional debt capacity available under its revolving credit facility.
During the quarter, Moody’s repurchased 3.5 million shares at a total cost of $320.5 million. As of Sep 30, 2014, Moody’s had $1 billion of share repurchase authorization remaining under its current programs.
Guidance
Moody’s expects 2014 revenues to grow in the low double-digit percent range. Operating expenses are projected to increase in the high single-digit percent range.
Operating margin is projected to be between 42% and 43%. Earnings for 2014 are expected to be in the range of $3.95 to $4.05 per share. The Zacks Consensus Estimate is currently pegged at $4.03 for 2014.
For 2014, share repurchases are expected to be approximately $1.25 billion. Capital expenditure is projected to be approximately $90 million. Moody’s expects approximately $100 million in depreciation and amortization expense. Free cash flow is expected to be approximately $900.0 million.
MIS revenues for 2014 are expected to increase in the high single-digit percent range. U.S. MIS revenues are expected to increase in the mid single-digit percent range (up from low single-digit percent range), while non-U.S. MIS revenues are expected to increase approximately 10%.
Corporate finance revenues are projected to grow 10%. Revenues from structured finance are expected to grow in the high-single-digit percent range while revenues from financial institutions are expected to grow in the mid single-digit percent range.
Public, project and infrastructure finance revenues are expected to increase in the mid single-digit percent range.
MA revenues for 2014 are expected to increase in the mid-teens 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 high-teens percent range.
Revenues from research, data and analytics are projected to grow in the high single-digit percent range. Including the acquisition of WebEquity, revenues from enterprise risk solutions are expected to grow in the mid-teens percent range. Professional services revenues, including Amba Investment Services, are expected to grow approximately 40%.
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. Moody’s has plenty of growth opportunities from higher number of debt issuance, increasing disintermediation in Europe and Asia, strong potential in the 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.
Further, 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 #2 (Buy).
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