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Moody's (MCO) Up 16% Since Last Earnings Report: Can It Continue?

It has been about a month since the last earnings report for Moody's (MCO). Shares have added about 16% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Moody's due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Moody's Q3 Earnings Miss, Revenues Decline Y/Y

Moody's reported third-quarter 2022 adjusted earnings of $1.85 per share, which lagged the Zacks Consensus Estimate of $2.06. The bottom line also plunged 31% from the year-ago quarter figure.

Subdued issuance volume was a major headwind, which hurt Moody’s results. A rise in operating expenses posed an undermining factor. However, strategic buyouts strengthened the MA segment’s performance. The company’s liquidity position was robust during the quarter.

After taking into consideration certain non-recurring items, net income attributable to Moody's Corporation was $303 million or $1.65 per share, down from $474 million or $2.53 per share in the prior-year quarter.

Revenues Down, Costs Up

Revenues were $1.28 billion, which missed the Zacks Consensus Estimate of $1.35 billion. The top line declined 16% year over year. Foreign currency translation unfavorably impacted revenues by 4%.

Total expenses were $873 million, up 1%. The rise was mainly due to operational and transaction-related costs related to the recent acquisitions. Foreign currency translation positively impacted operating expenses by 5%.

Adjusted operating income of $497 million was down 33%. Adjusted operating margin was 39%, down from 48.3% a year ago.

Mixed Segment Performance

Moody’s Investors Service revenues plunged 36% year over year to $590 million. The fall was mainly due to muted capital market activities. Foreign currency translation affected the segment’s revenues by 3%.

Moody’s Analytics revenues grew 14% to $685 million. This was mainly driven by the RMS acquisition and steady demand for Know Your Customer solutions and credit research. Foreign currency translation unfavorably impacted the segment’s revenues by 7%.

Strong Balance Sheet

As of Sep 30, 2022, Moody’s had total cash, cash equivalents and short-term investments of $1.75 billion, down from $1.9 billion as of Dec 31, 2021.

The company had $7.5 billion in outstanding debt and $1.25 billion in additional borrowing capacity under the revolving credit facility.

Share Repurchase Update

During the quarter, Moody's repurchased shares worth $113 million.

2022 Guidance

Moody’s lowered its earnings guidance on subdued year-to-date performance and “the ongoing macro uncertainties.” The company expects adjusted earnings of $8.20-$8.50 per share, down from the prior mentioned $9.20-$9.70 per share.

On a GAAP basis, earnings are projected to be $6.90-$7.20 per share, lower than the earlier mentioned $8.10-$8.60 per share.

Moody’s projects revenues to decrease in the low-double-digit percent range, a change from the earlier stated fall in the high-single-digit percent range.

Operating expenses are projected to increase in the mid-single-digit percent range, changed from previously mentioned high-single-digit percent growth.

Net interest expenses are expected to be $220-$240 million.

Adjusted operating margin is expected to be 42%, down from the prior stated 44%.

The operating margin is likely to be 34-35%, lower than 37-38% previously targeted.

Moody’s expects cash flow from operations of $1.5 billion, lower than $1.7-$1.9 billion stated earlier. Similarly, free cash flow is projected to be $1.2 billion, down from $1.4-$1.6 billion mentioned previously.

The company will likely repurchase shares worth $1 billion.

The effective tax rate is projected to be 20.5-22.5%.

Segment Outlook for 2022

MIS segment revenues are anticipated to decline 30%, a change from the prior stated decrease in the low-twenties percent range.

Adjusted operating margin is expected to be 51%, lower than the previously stated 54-55%.

Coming to the MA segment, Moody’s anticipates revenues to grow in the mid-teens percent range.

Adjusted operating margin is expected to be 30%, changed from the previously mentioned 29%. Further, the segment’s organic Annualized Recurring Revenue (ARR) is projected to rise in the low-double-digit percent range.

2022-2023 Geolocation Restructuring Program

Management expects the program to help the company further adapt to the new global workplace and talent realities. Also, the restructuring plan will accelerate a number of ongoing cost-efficiency initiatives, and includes real estate optimization and increased utilization of lower-cost operational hubs.

The program is expected to result in annualized savings of $100-$135 million per year.

The exit from certain leased office spaces is expected to begin late in 2022 or early 2023 and is expected to result in $50-$70 million of pre-tax charges to either terminate or sublease the affected real estate leases.

The program also includes $75-$100 million of pre-tax personnel-related restructuring charges, an amount that includes severance and related costs primarily determined under the company’s existing severance plans.

Cash outlays associated with the program are expected to be $75-$100 million, which are expected to be paid through 2024.

The program is expected to be substantially complete by the end of 2023.

Medium-Term Targets

Moody’s projects total revenue growth of at least 10%, with adjusted operating margin in the low-50s range. Adjusted earnings per share are anticipated to increase in the low double-digit percentage range.

MA segment revenues are projected to grow in the low-to-mid teen percentage range, with adjusted operating margin in the mid-30s range.

MIS segment revenues are anticipated to rise in the low-to-mid-single-digit percentage range, with adjusted operating margin in the low-60s range.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

The consensus estimate has shifted -25.14% due to these changes.

VGM Scores

At this time, Moody's has a poor Growth Score of F, however its Momentum Score is doing a bit better with a D. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Moody's has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.

Performance of an Industry Player

Moody's is part of the Zacks Financial - Miscellaneous Services industry. Over the past month, American Express (AXP), a stock from the same industry, has gained 4.8%. The company reported its results for the quarter ended September 2022 more than a month ago.

American Express reported revenues of $13.56 billion in the last reported quarter, representing a year-over-year change of +24.1%. EPS of $2.47 for the same period compares with $2.27 a year ago.

American Express is expected to post earnings of $2.15 per share for the current quarter, representing a year-over-year change of -1.4%. Over the last 30 days, the Zacks Consensus Estimate has changed -0.2%.

American Express has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of B.

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