Moody's: Earnings Preview

Feb. 1.10 | About: Moody's Corporation (MCO)

The earnings outlook for Moody’s Inc. (NYSE:MCO) remains robust ahead of its fourth-quarter results on February 4, with the current Zacks Consensus Estimate at 39 cents per share. A surge in bond issuance activity will boost the company’s fourth-quarter earnings.

However, there has been no analyst estimate revision in the last three months. We see no estimate revision in the upcoming quarter, with earnings coming in line with the Zacks Consensus Estimate. Over the coming quarters, we expect earnings surprises to be non existent. The major reason for this is that we don’t expect a major improvement in the company’s Structured Finance business. Additionally, Moody’s has been accused of issuing inflated ratings and has been facing various ongoing regulatory issues worldwide, including the U.S. and Europe.

However, Moody’s’ quarterly results always had an element of surprise. In the third quarter, the company beat the Zacks Consensus Estimate by 13.2%, with an average surprise for the last four quarters (including the third quarter of 2009) of 16.0%, reflecting an improvement in credit markets and growth in Moody’s’ Analytics business.

We believe that Moody’s remains a solid franchise in rating debt instruments and will show substantial growth with its diversified credit research business model and international growth. Revenues for the last quarter came in at $451.8 million, up 4% from $433.4 million reported in the year-ago quarter. Excluding the unfavorable impact of foreign currency, revenues increased 6% year over year.

The company raised its outlook for fiscal 2009 during the third quarter conference call, for the second time this year, due to continuing strength in corporate debt issuance. Earnings per share are expected to be in the $1.60 – $1.68 range, up from its previous outlook of $1.45 –$1.55. Revenues for the full year are expected to be flat year over year, versus the previous expectation of a decline in the mid-single-digit percentage range. Recurring revenue is expected to be stable.

Operating expenses are expected to increase in the high-single-digit percentage range (previously expected to be in the mid-single-digit percent range). As a result, operating margin is now projected in the high-thirties percentage range versus the previous projection of mid- to high-thirties percentage range. The effective tax rate is expected to be in the 37% to 38% range.

For the global MIS business, Moody’s expects revenues to decline in the low single-digit percentage range (previously high single-digit percentage range), while Moody’s Analytics revenue growth is still expected to be in the low single-digit percentage range, driven by strong growth in software revenue attributable to the Fermat acquisition.

We are optimistic about Moody’s recent performance, although we do not expect significant movement in share prices when the company reports. Also, while there has been a lack of estimate revisions for 2010, the Zacks Consensus Estimate of $1.65 for the year is in line with the company’s own guidance.

We do believe that management will come up with a higher guidance for 2010 due to continuing strength in corporate debt issuance as the economy is showing signs of recovery. We maintain our Neutral recommendation on the shares.