Moody’s Corp. MCO reported earnings of $1.11 per share in the first quarter of 2015, surpassing with the Zacks Consensus Estimate of $1.03 and up from $1.00 reported a year ago.
Revenue Details
Revenues of $865.6 million came above the Zacks Consensus Estimate of $828 million and increased 13% year over year.
Domestic revenues increased 17% year over year to $499.8 million, while International revenues increased 7% to $365.8 million.
Quarterly Segment Details
Segment-wise, Moody’s Investors Service (MIS) revenues increased 14% year over year to $602.3 million. MIS revenues in the U.S. rose 18% on a year-over-year basis, while revenues outside the U.S. grew 8% from the year-ago quarter.
Within the MIS segment, Global Corporate Finance revenues increased 13% year over year to $298.7 million, reflecting increased investment-grade bond issuance in the U.S. and growth in the number of credits monitored.
Global Structured Finance revenues rose 6% year over year to $101.3 million, primarily due to strong global collateralized loan obligation issuance and increased residential mortgage backed securities issuance in Europe and the U.S.
Global Financial Institutions revenues grew 10% year over year to $93.8 million, driven by higher revenues from U.S. finance companies and insurers. Global public project and infrastructure finance revenues were up 25% year over year to $100.7 million. The growth was primarily backed by strong growth in U.S. public finance and infrastructure finance issuance.
Moody’s Analytics (MA) revenues grew 11% year over year to $263.3 million bolstered by growth in research, data and analytics (RD&A) revenues (up 9%) and Enterprise risk solutions (ERS) revenues (up 29%). MA revenues in the U.S. were $128.3 million, up 17%, and revenues outside the U.S. were $135.0 million, up 5%.
Margin
First-quarter 2015 operating expense was $494.3 million, up 14% from the prior-year period, primarily due to increased headcount and added operating expense from 2014 acquisitions.
The company reported adjusted operating income of $399.9 million, up 12% year over year. Adjusted operating margin was 46.2%, down 20 basis points year over year.
Balance Sheet
Moody’s’ total cash, cash equivalents and short-term investments at the end of the first quarter were $2 billion, up from $1.7 billion in 2014. The company exited the quarter with $3.1 billion of total debt. At quarter-end, Moody’s had $3.1 billion of outstanding debt and $1.0 billion of additional debt capacity available under its revolving credit facility. Free cash flow was $242.8 million, up 54% from first-quarter 2014 due to the increase in net income and changes in working capital.
Share Repurchase
During first-quarter 2015, Moody’s repurchased 3.8 million shares for $365.8 million and issued 2.3 million shares against annual employee stock-based compensation plans. As of Mar 31, 2015, the company had $1.2 billion of share remaining under its repurchase authorization.
Guidance
The company expects full-year 2015 revenues and operating expense to grow in the mid single-digit range. The company projects an operating margin of approximately 43% and an adjusted operating margin of roughly 43%. The effective tax rate is expected within 32–33%.
The company expects 2015 diluted earnings per share in the range of $4.55 to $4.65.
Further, the company expects capital expenditures in the range of $110–$115 million and free cash flow of $1 billion in 2015. Share repurchase is expected to be nearly $1 billion.
Our Recommendation
Moody’s reported strong fourth-quarter 2014 results, surpassing the Zacks Consensus Estimate for both earnings and revenues. 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. The company is well poised to gain from higher number of debt issuance, increasing disintermediation in Europe and Asia, strong potential in the analytics business and improving pricing trends.
However, increasing competition from the likes of Fitch and 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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