Moody's Raises 2010 Outlook - Analyst Blog

A leader in the credit rating industry, Moody's Corp (MCO) raised its full year 2010 revenue and earnings per share (EPS) guidance based on increased U.S. debt issuance and demand for junk bonds. The shares rose 8.6% ($2.35) and closed at $29.67 following the announcement.

The increased outlook is driven by a higher revenue forecast attributable to robust fourth quarter bond market issuance benefiting Moody's Investors Service (MIS) and a quick completion of software projects for Moody's Analytics customers, according to management.

Moody's had already raised its full year 2010 guidance during the third quarter 2010 earnings call on October 28^th and this is the second time the company is raising its outlook.

Earnings per share are expected to be in the $2.08 to $2.14 range, up from the previous $1.90 – $1.96 range. The Zacks Consensus Estimate is currently pegged at $1.91 per share.

Full year 2010 revenues are expected to increase approximately 13.0% versus the previous expectation of an increase in the high single-digit to low-double-digit percentage range. The company did not provide any details on segment revenue growth.

Operating margin is projected in the high 30.0% range, consistent with the previous expectation. The effective tax rate is expected to be in the range of 30% to 31% versus previous expectation of 33% to 34% primarily due to utilization of foreign tax credits and lower foreign and state taxes.

The outlook includes regulatory and technology spending, headcount additions and incremental expense. The guidance does not include any impact from the acquisition of CSI Global Education announced on November 22, 2010.

Moody's will release its fourth quarter and full year 2010 results before market opens on February 3, 2011.

Third Quarter 2010 Highlights

Moody's third quarter 2010 earnings beat the Zacks Consensus Estimate by 29.0% based on higher revenues that also exceeded expectations by 8.5%. The results reflect a strong activity in corporate and financial institution debt markets, largely driven by a high-yield bond and higher bank loan issuance.

Excluding restructuring charges, quarterly earnings stood at 58 cents per share, up 34.9% from 43 cents per share reported in the year-ago quarter. Earnings surpassed the Zacks Consensus Estimate of 45 cents per share.

Revenues in the quarter totaled $513.3 million, up 13.6% from $451.8 million in the year-ago quarter. Revenues were well above the Zacks Consensus Estimate of $473.0 million.

Maintain Neutral

Given the company's strong revenue and earnings trends and moderating regulatory concerns, we believe revenue and earnings estimates for 2010 and 2011 will most likely go up in the coming days.

However, weak Structured Finance business and increased expenses could pull back gains in the near term.

We believe Moody's will remain a solid franchise in rating debt instruments with its diversified credit research business model and international growth.

Over the long term, Moody's expects to deliver double-digit revenue growth and over 40.0% in operating margin on the back of growing Investor Service and Analytics business.

Currently, Moody's has a Zacks #3 Rank, which implies a Hold rating on a short-term basis (1-3 months). Over the long term (6-12 months), we maintain our Neutral rating on the stock.