Moody’s Corp. (MCO - Analyst Report) reported earnings of $1.12 per share in the fourth quarter of 2014, which rose 32% from the year-ago quarter and beat the Zacks Consensus Estimate of 94 cents.

Moody's Corporation - Earnings Surprise | FindTheBest

For 2014, the company reported adjusted earnings per share of $4.21, up 15% year over year from $3.65.

Revenue Details

Revenues of $877.5 million surpassed the Zacks Consensus Estimate of $848 million and increased 13% year over year. Revenues for 2014 increased 12% to $3.3 billion.  

Domestic revenues increased 14.7% year over year to $478.7 million, while International revenues increased 10.2% to $398.8 million.

Quarterly Segment Details

Segment-wise, Moody’s Investors Service (MIS) revenues increased 7% year over year to $565.1 million. MIS revenues in the U.S. rose 14% on a year-over-year basis, while revenues outside the U.S. declined 2% from the year-ago quarter.

Within the MIS segment, Global Corporate Finance revenues increased 9% year over year to $263.3 million, reflecting increased investment-grade bond issuance in the U.S. and growth in the number of credits monitored.

Global Structured Finance revenues rose 9% year over year to $118.5 million, primarily due to strong global collateralized loan obligation issuance and increased residential mortgage backed securities issuance in Europe and the U.S.

Global Financial Institutions revenues decreased 4% year over year to $85.3 million, due to lower issuance activity from banking institutions in the U.S. and Europe. Global public project and infrastructure finance revenues were up 9% year over year to $90.1 million. The growth was primarily due a strong growth in U.S. public finance and infrastructure finance issuance.

Moody’s Analytics (MA) revenues grew 23% year over year to $312.4 million bolstered by growth in research, data and analytics (RD&A) revenues (up 11%) and Enterprise risk solutions (ERS) revenues (up 42%). MA revenues in the U.S. were $135.0 million, up 15%, and revenues outside the U.S. were $177.4 million, up 30%.

Margin

Quarterly operating expense was $532.8 million, up 14% year over year. For 2014, operating expense was $1.9 billion, up 9% from the year-ago period.

The company reported adjusted operating income of $371.7 million, up 11% year over year. Adjusted operating margin for the year was 42.4%, down 60 basis points (bps). Adjusted operating income for 2014 was $1.5 billion, which grew 16% year over year and resulted in operating margin of 46%, up 130 bps.

Balance Sheet

Moody’s’ total cash, cash equivalents and short-term investments at year-end were $1.7 billion, down $428.7 million from a year earlier, owing to shareholder returns. Full-year 2014 free cash flow was $944.0 million, up $59.5 million or 7% from 2013. The company exited the year with $2.5 billion of outstanding debt and $1 billion of additional debt capacity available under its revolving credit facility.

Dividend and Share Repurchase

On Dec 16, 2014, Moody’s increased its quarterly dividend by 21% to 34 cents per share. In 2014, the company returned $236 million to its shareholders via dividend payments.

In addition, the company’s board of directors authorized a $1 billion share repurchase program, effective following completion of the existing program. As of Dec 31, 2014, the company had $1.6 billion remaining under its share repurchase authorisation, which includes the recently approved repurchase program.

Guidance

The company expects full-year 2015 revenues and operating expense to grow in the mid single-digit range. On a constant currency basis, revenues and operating expense growth rate is expected to be approximately 300 bps. The company projects an operating margin of approximately 43% and an adjusted operating margin of roughly 46%. The effective tax rate is expected to range within 32–33%.

The company expects 2015 diluted earnings per share in the range of $4.55 to $4.65.

Further, the company expects capital expenditures in the range of $110–$115 million and free cash flow of $1 billion in 2015. Share repurchase is expected to be approximately $1 billion.

Our Recommendation

Moody’s reported strong fourth-quarter 2014 results, beating the Zacks Consensus Estimate for both earnings and revenues. We believe that Moody’s remains a solid franchise in rating debt instruments based on its diversified credit research business model and international growth opportunities. The company is well poised to gain from higher number of debt issuance, increasing disintermediation in Europe and Asia, strong potential in the analytics business and improving pricing trends.

However, increasing competition from the likes of  Fitch and McGraw Hill Financial’s (MHFI - Analyst Report) Standard & Poor's division, Dun & Bradstreet (DNB - Analyst Report) and Euronet (EEFT - Snapshot Report) is a major concern, going forward.

Currently, Moody’s has a Zacks Rank #4 (Sell).

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