Zacks_Analysts' Blog : Moody's Reports Disappointing 4Q - Analyst Blog

Moody’s Corp. (MCO) reported fourth quarter 2011 earnings of 43 cents per share, which missed the Zacks Consensus Estimate by six cents. Earnings per share decreased 27.0% year over year, primarily dragged by weak top-line growth.

Quarter Details

Revenue edged up 0.5% year over year to $567.1 million, but surpassed the Zacks Consensus Estimate of $556.0 million. Moody's Business Analytics (MA) was the primary growth driver in the reported quarter. Revenue from the U.S. decreased 3.0% year over year to $286.3 million, while international revenue increased 4.0% to $280.8 million.

Segment wise, Moody’s Investors Service (MIS) revenues dipped 4.1% year over year to $366.9 million. MIS revenues in the U.S. declined 9%, while revenues outside the U.S. rose 2.0% from the year-ago quarter.

Within the MIS segment, Global Corporate Finance revenues declined 14.3% year over year to $141.2 million, while Global Structured Finance revenues jumped 14.2% year over year to $86.9 million. Global Financial Institutions’ revenue increased 1.7% year over year to $66.8 million. Global public, project and infrastructure finance revenues declined 5.5% year over year to $72.0 million.

Moody's Analytics (MA) revenues grew 10.2% year over year to $200.2 million, buoyed by an increase in Research, Data and Analytics revenues (up 5.7%) and Professional services revenues (up 99.3%), which fully offset a decline in Risk management software revenue (3.4%). MA revenues increased 15.0% in US, while outside the U.S. it rose 7.0% on a year-over-year basis in the reported quarter.

Operating income, excluding restructuring charges and legacy tax, came in at $172.0 million in the fourth quarter, down 12.6% year over year, primarily due to higher operating expenses (up 7.5%). Net income decreased 30.0% year over year to $96.0 million in the reported quarter.

Liquidity

Moody's exited the quarter with $774.8 million in cash and cash equivalents and short-term investments compared with $867.5 million in the previous quarter. At quarter end, Moody’s had $1.24 billion of outstanding debt and had additional debt capacity of $1.0 billion under its revolving credit facility.

Guidance

Moody’s expects diluted earnings per share in the range of $2.62 to $2.72 for fiscal 2012. Currently, the Zacks Consensus Estimate is pegged at $2.64 for fiscal 2012.

For fiscal 2012, Moody’s expects revenues to increase in the high-single to low-double-digit percent range. However, expenses are also projected to increase in the high-single to low-double-digit percent range. Operating margin is projected to be approximately 39%.

Segment wise, global MIS revenue is expected to increase in the mid-single-digit percent range for fiscal 2012. Domestic MIS revenue is estimated to increase in the low-double-digit percent range, while overseas revenue is expected to remain flat. MA revenue will likely increase in the in the high-teens percent range both in the U.S. and outside the U.S.

Recommendation

We believe Moody’s remains a solid franchise in rating debt instruments based on its diversified credit research business model and international growth.

However, a sluggish global economy, increasing regulatory complications, and increasing competition from Dun & Bradstreet Corp (DNB) and privately-held Fitch Ratings Inc. and Standard & Poor’s Financial Services LLC may hurt its profitability going forward.

We remain Neutral on a long-term basis (6-12 months). Currently, Moody’s has a Zacks #3 Rank, which implies a Hold rating in the short term (1-3 months).