Moody’s Earnings: Better Issuance Outlook; Moody’s Analytics Resilient

Amid improving bond issuance, wide-moat Moody’s MCO posted a decent second quarter. Revenue of $1.49 billion and adjusted EPS of $2.30 topped FactSet consensus estimates by 3% and 2%, respectively. We attribute the beat to better ratings revenue. As we increase our near-term ratings revenue projections, we are modestly increasing our fair value estimate on Moody’s shares to $325 from $315.

Ratings revenue increased 6%, and we note the last time ratings revenue increased was the fourth quarter of 2021. Corporate bond volumes which were down sharply in 2022 are showing signs of life. Corporate finance revenues were up 13% with investment grade revenues up 38% and high-yield bond revenues up 48% against an easy comparison. Moody’s noted that the duration of bonds issued is declining by a few years with investment grade having average duration of around 12 years and high-yield about 6 years which compares to 15 years and 8 years respectively in prior years. If this trend were to continue, we would view this as a modest positive as more frequent refinancing transactions could result in higher revenue for Moody’s. Financial institutions and public, project, and infrastructure finance revenues which tend to be less volatile than other categories performed well with 13% and 4% respectively. Structured finance was the one weak point, with weakness in commercial mortgage-backed securities as the commercial real estate sector sees headwinds. We expect headwinds in structured finance to continue. Given the strong quarter and strength in the financial sector, Moody’s raised its overall ratings revenue guidance to high-single-digit revenue growth from a low-to-mid single-digit percentage range.