Why Is Moody's (MCO) Down 2.5% Since Last Earnings Report?

A month has gone by since the last earnings report for Moody's (MCO). Shares have lost about 2.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Moody's due for a breakout? 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 Q1 Earnings Miss, Revenues Down on Subdued Bond Issuances

Moody's reported first-quarter 2022 adjusted earnings of $2.89 per share, which lagged the Zacks Consensus Estimate of $2.91. The bottom line also plunged 29% 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 that strengthened Moody’s Analytics segment’s performance acted as a tailwind. 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 $498 million or $2.68 per share, down from $736 million or $3.90 per share in the prior-year quarter.

Revenues Down, Costs Up

Revenues were $1.52 billion, which beat the Zacks Consensus Estimate of $1.51 billion. The top line declined 5% year over year. Foreign currency translation unfavorably impacted revenues by 2%.

Total expenses were $866 million, up 16% from the prior-year quarter. The rise was mainly due to operational and transaction-related costs related to the recent acquisitions. Foreign currency translation positively impacted operating expenses by 2%.

Adjusted operating income of $734 million was down 20%. Adjusted operating margin was 48.2%, down from 57.1% a year ago.

Mixed Segment Performance

MIS revenues decreased 20% year over year to $827 million. The fall was mainly due to geopolitical concerns, rising yields and elevated market uncertainty, which adversely impacted issuances in all asset classes. Foreign currency translation unfavorably impacted the segment’s revenues by 1%.

Corporate finance revenues tanked, given the decrease in leveraged finance issuance and slowdown in global investment-grade activity. Financial institutions’ revenues fell, mainly due to a decline in opportunistic issuance from infrequent U.S. banks and insurers on widening spreads and increased benchmark rates.

Public, project and infrastructure finance revenues also fell from the year-ago level, given lower infrastructure finance supply. Structured finance revenues were up, mainly driven by a significant increase in commercial and residential mortgage-backed securities issuance, partly offset by lower collateralized loan obligation activity.

MA revenues grew 23% to $695 million. Foreign currency translation unfavorably impacted the segment’s revenues by 2%.

The segment recorded growth in Decision Solutions revenues, Research & Insights revenues and Data & Information revenues.

Strong Balance Sheet

As of Mar 31, 2022, Moody’s had total cash, cash equivalents and short-term investments of $1.9 billion, relatively in line with the Dec 31, 2021 level. The company had $7.8 billion of outstanding debt and $1.25 billion in additional borrowing capacity under the revolving credit facility.

Share Repurchase Update

During the quarter, Moody's repurchased 0.5 million shares for $158 million.

2022 Guidance

On the back of a challenging operating environment and expected fall in global issuances, management now anticipates adjusted earnings in the range of $10.75-$11.25 per share, down from the prior outlook of 12.40-$12.90 per share. On a GAAP basis, earnings are now projected within $9.85-$10.35 per share, lower than the earlier range of $11.50-$12.00.

Moody’s projects revenues to be relatively flat, a change from the earlier estimation of an increase in the high-single-digit percent range.
 
Expenses are projected to rise in the high-single-digit percent range, a change from the prior estimation of a jump in the low-double-digit percent range.

Net interest expenses are expected in the range of $200-$220 million.

Adjusted operating margin is expected to be approximately 47%, down from prior guidance of 49-50%.

Also, operating margin is now likely to be 41-42%, lower from the 44-45% range previously targeted.

Moody’s now expects cash flow from operations to be $2.1-2.3 billion, lower than $2.45-$2.65 billion estimated earlier. Similarly, free cash flow is now projected to be $1.8-$2 billion, down from $2.3-$2.5 billion expected previously.

Capital expenditures are anticipated to be roughly $250-$300 million.

The company will likely repurchase shares worth $1.5 billion.

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

Segment Outlook for 2022

MIS segment revenues are now anticipated to decline in the low-double-digit percent range, a change from prior guidance of an increase in the low-single-digit percent range.

Adjusted operating margin is now expected to be approximately 59%, lower than the previous estimation of 62%.

Coming to the MA segment, Moody’s anticipates revenues to grow in the high-teens percent range. Adjusted operating margin is expected to be roughly 29%. Further, the segment’s organic Annualized Recurring Revenue (ARR) is projected to rise in the low-double-digit percent range.

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 estimates review.

The consensus estimate has shifted -10.62% due to these changes.

VGM Scores

Currently, Moody's has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% 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. Notably, Moody's has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

Moody's belongs to the Zacks Financial - Miscellaneous Services industry. Another stock from the same industry, Blackstone Inc. (BX), has gained 9.5% over the past month. More than a month has passed since the company reported results for the quarter ended March 2022.

Blackstone Inc. reported revenues of $3.5 billion in the last reported quarter, representing a year-over-year change of +71.1%. EPS of $1.55 for the same period compares with $0.96 a year ago.

For the current quarter, Blackstone Inc. is expected to post earnings of $1.54 per share, indicating a change of +87.8% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.

Blackstone Inc. 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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