Moody’s Earnings: Analytics Solid, Ratings Grows Against Easy Comps but Ratings Outlook Lowered

Moody’s MCO reported a decent third quarter. Revenue of $1.47 billion was a touch higher than the FactSet consensus estimate of $1.46 billion while adjusted EBITDA of $657 million came in below the consensus estimate of $676 million. We attribute this and the positive market reaction to strong results in the firm’s lower margin but heavily subscription-based analytics segment. Constant currency Moody’s Analytics revenue grew 11% in the quarter, an uptick from 10% in the second quarter. We will maintain our wide moat rating and $325 fair value estimate on Moody’s shares. We regard shares as being roughly fairly valued.

Ratings revenue increased 18% against easy comparisons to $696 million. High-yield and leveraged loan ratings revenue was a combined $120 million, up from a very slow $67 million in the year-ago quarter. Investment-grade revenue was down sequentially but relatively steady from the year-ago quarter. Structured finance revenue continues to be soft. Financial institutions and public finance revenue were both down sequentially but up from the year-ago period. Moody’s lowered its expectation for fourth-quarter investment-grade and structured finance issuance and as a result now expects full-year ratings revenue to grow in a mid- to high-single-digit percentage range versus its previous high-single-digit percentage expectation.

Management expressed some optimism that refinancing walls have increased and that private equity dry powder could lead to deal activity thus resulting in debt issuance. In addition, management noted debt issuance as a percentage of debt outstanding, what it termed “debt velocity,” is well below historical averages. That said, we believe investors should also consider that firms might deleverage, private equity firms may use greater equity to fund deals in a high-rate environment, and that low debt velocity is what you’d expect in a period of rising rates as there is little incentive to refinance.