Moody’s Corporation

Moody's Corporation (NYSE: MCO) is a multinational risk assessment firm. Moody's Investors Service and Moody's Analytics are the company's two segments. The MIS segment publishes credit ratings and offers assessment services for a variety of debt obligations, initiatives, and facilities, as well as the entities that issue them in global markets, including corporate, financial institution, and governmental obligations, as well as structured finance securities. The MA sector creates a variety of products and services to assist institutional participants in global financial markets with risk management.

Latest News

• Moody's Corporation Announces First Quarter 2022 Results: Moody's Corporation released its first-quarter results on May 2, 2022, and raised its projection for the full year, citing growth in Moody's KYC solutions and credit research as reasons for another strong quarter in Moody's Analytics. Because of MIS's first-quarter performance and the likelihood of prolonged market volatility, the firm has reduced its full-year 2022 adjusted diluted EPS projection range to USD 10.75 to USD 11.25.
• Suspension of commercial operations in Russia: On March 5, 2022, Moody's Corporation stated that its commercial activities in Russia had been suspended. Both Moody's Investors Service (MIS) and Moody's Analytics (MA) activities were shut down. Furthermore, on March 24, 2022, Moody's declared that it would no longer rate Russia's corporations.
• Completion of Acquisition of Kompany: The acquisition of 360kompany AG (Kompany) by Moody's Corporation was finalized on March 1, 2022, as announced on December 3, 2021. Kompany is an audit-proof business verification and Know Your Customer (KYC) technology platform established in Vienna, Austria. Moody's technology, data, and analytical capabilities will be enhanced because of the purchase, as will its industry-leading client solutions for KYC, anti-money laundering, compliance, and counterparty risk.

Q1 FY22 Financial results

• Revenue Highlights: For the three months ending March 31, 2022, Moody's Corporation recorded sales of USD 1.5 billion, down 5% from the previous year. Foreign currency translation had a negative impact on Moody's revenue by 2%. Furthermore, MIS revenue in the first quarter of 2022 was USD 827 million, down 20% from the prior-year period, as geopolitical concerns, rising yields, and increased market uncertainty harmed issuance across the board. While MA's revenue in the first quarter of 2022 was USD 695 million, up 23 percent from the prior-year period, when both organic revenue and organic ARR, which excludes the impact of recent acquisitions, each increased by 9%. Both total and organic MA revenue were negatively impacted by foreign currency translation by 2% apiece.
• Analysis of operational and profitability efficiency: Operating expenses for Moody's Corporation in the first quarter of 2022 reached USD 866 million, up 16 percent year over year due to operational and integration costs connected with recent acquisitions, which accounted for around 13 percentage points of increase. Operating income was down 23% to USD 656 million, while adjusted operating income was down 20% to USD 734 million, which mostly eliminated depreciation and amortization expenditures. Moody's operating margin was 43.1 percent and adjusted operating margin was 48.2 percent, respectively, compared to 58.6 percent and 32.1 percent YoY. For the first three months of 2022, Moody's effective tax rate was 18.2 percent, up from 14.6 percent the previous year. The settlement of uncertain tax positions in the first quarter of 2021 accounted for most of the rise.
• Dividends and share repurchase program: In April 2022, Moody's executed a USD 500 million accelerated share buyback program during the first quarter of 2022. The ASR began in the first quarter of 2022, and 1.5 million shares were distributed. During the first quarter of 2022, Moody's paid USD 130 million in dividends to its investors. The Board of Directors announced a normal quarterly dividend of USD 0.70 per share of MCO Common Stock on April 26, 2022. The dividend will be paid to stockholders of record at the close of business on May 19, 2022, on June 10, 2022.
• Balance sheet analysis: Moody's had USD 7.8 billion in outstanding debt and a USD 1.25 billion revolving credit facility at the end of the quarter. At the quarter's conclusion, total cash, cash equivalents, and short-term investments were USD 1.9 billion, almost level from December 31, 2021. For the first three months of 2022, cash flow from operations was USD 470 million, while free cash flow was USD 411 million.

Key Risks

• High level of Competition: Moody’s Corporation faces a high level of competition from IHS Markets, Bloomberg, Refinitiv, Morningstar, Kroll Bond Rating Agency, Fitch Rating, Axesor, and S&P Global.
• FX risk: In Q1 FY22, the revenue for Moody’s fell by 5% out of which 2% was from the fluctuation in the FX rate. Hence with operations in more than 130 countries and with current market scenarios of Dollar appreciation, FX risk becomes one of the primary risks for Moody’s.

Outlook

Revenue for the whole year is forecast to be flat, down from a single digit increase in the previous estimate, with operating margins for the full year likely to be in the range of 41 percent to 42 percent. Share repurchases of at least USD 1.5 billion are expected for the full year 2022, subject to available funds, market circumstances, M&A prospects, and other continuing capital allocation considerations. Full-year diluted EPS in 2022 is expected to range from USD 9.85 to USD 10.35, while adjusted diluted EPS is expected to range from USD 10.75 to USD 11.25. Finally, the company should produce operational free cash flows of between USD 1.8 and USD 2 billion.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation

MCO's stock price has fallen 26.42% in the past six months and is currently leaning toward the lower end of its 52-week range of USD 284.47 to USD 407.94. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 334.66.

Considering a 26.42% correction in the past six months with expected recovery, with strong fundamentals, positive outlook, associated risks, and current valuation. We recommend a " Buy" rating on the stock at the current price of USD 286.05, as of May 10, 2022, at 7:45 AM PDT.

One-year technical chart as of 10^th May 2022, at 7:45 AM PDT. Source: REFINITIV. Analysis by Kalkine group

Technical Analysis Summary

* Current price as of May 10, 2022, at 7:45 AM PDT.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and subject to the factors discussed above. 

Note 3: The report publishing date is as per the Pacific Time Zone.