Moody’s Corp (MCO) is an industry leader in credit ratings. We maintain our Neutral rating on Moody’s but raise our price target to $29.00 from our previous target of $25.00 on better-than-expected results.
Results for 2009, although below year-ago levels, were better than the Zacks Consensus Estimates, reflecting an improvement in credit markets, continuing strength in corporate debt issuance 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.
However, the company provided a conservative outlook for 2010 on rising operating expenses. Although we believe that over the longer-term Moody’s will show substantial growth, we maintain a cautious approach as margins may come under pressure due to incremental costs related to regulatory issues in 2010.
Although the economy is showing signs of revival, we expect a slow recovery in debt markets as they face a tempered credit environment. Moreover, we don’t expect a major improvement in the Structured Finance business. While management expects Structured Finance revenue to increase in the mid-single-digit percent range in 2010 reflecting modest growth in most asset classes, we note that investor confidence remains limited for the near-term.
Moody’s competitors are mostly privately held, such as Fitch Ratings and Standard & Poor’s. The company also competes against several diversified companies, such as Thomson-Reuters Corp. (TRI), Bloomberg, RiskMetrics Group Inc. (RISK), Dun & Bradstreet Corp. (DNB), Markit Group, Interactive Data Corporation (IDC) and many other smaller providers.
Estimate Revision Trend
Moody’s reported fourth quarter 2009 (most recent quarter) results on February 4, 2010. Revenues for full-year 2009 increased 2.4% year over year to $1.80 billion, versus management’s expectation of flat year-over-year revenues.
Moody’s fourth-quarter earnings beat the Zacks Consensus Estimate of 40 cents per share, a surprise of 5%. Excluding restructuring charges, quarterly earnings stood at 42 cents per share, up 13.5% from 37 cents per share in the year-ago period.
The results reflected improvement in the credit market due to the broadening of corporate debt issuance from investment-grade into high-yield, boosting the company’s earnings.
Moody’s has posted positive surprises in the last four quarters. The fourth quarter surprise was toward the lower end of its positive quarterly surprises in the preceding three quarters. The average surprise for the last four quarters (including the third quarter of 2009) is an impressive 11.4%.
However, the company’s conservative guidance due to higher expenses has been reflected in analysts’ estimate revisions. Two of the 7 analysts covering the stock have raised their 2010 EPS estimates in the last 30 days, while 1 has moved in the opposite direction.
For 2010, management expects EPS to be in the $1.75 – $1.85 range, while the current Zacks Consensus Estimate for 2010 is $1.86 per share, a penny above the high end of the company’s guidance. The full-year 2010 estimate represents a 10% increase over the 2009 level, driven by higher revenue, as management expects full-year 2010 revenues to increase in the high-single-digit percentage range.
The company enjoys a high organic growth rate, along with strong profit margins and cash flows. The company has tripled its revenue from $602.3 million in 2000 to $1,797.2 million in 2009. The EPS also grew from $0.97 to $1.69 during the same period.
Operating cash flow increased more than nine-fold from $70.2 million in 2000 to $643.8 million in 2009. Approximately 63% of MCO’s total revenue is recurring in nature, which the company expects will remain stable in future quarters.
Although we expect bond activity to remain strong and also see some recovery in the credit markets, we expect earnings surprises to be non-existent over the coming quarters, as we believe the incremental effects of the recovery will take much longer.
The current Zacks Consensus Estimate for the first quarter of 2010 is 44 cents per share, and has seen no revisions in the last 30 days. We do not expect any surprises this quarter, with earnings now thought to be exactly in-line with the current Zacks Consensus.
Our long-term recommendation on Moody’s shares remains Neutral with a Zacks #3 Rank, implying a short-term Hold recommendation (1-3 months). However, continued resurgence in the company’s results, positive earnings momentum owing to its improved revenues and robust cash flow has led to raise our price target.
Read the full analyst report on “MCO”
Read the full analyst report on “TRI”
Read the full analyst report on “RISK”
Read the full analyst report on “DNB”
Read the full analyst report on “IDC”
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