Raymond James analysts Patrick O’Shaughnessy and Cory Dlugozima maintain an Outperform rating for Moody’s Corporation (NYSE:MCO) as they provide an earnings preview for the company.
We maintain our Outperform investment rating on Moody’s Corporation (NYSE:MCO) and increase our target price to $82 ahead of the firm’s 4Q13 earnings release, scheduled for February 7. While near-term comps are challenging for Moody’s ratings business, we expect a number of factors such as bank disintermediation and a gradual rebound in structured finance to drive sustained revenue growth. Further, despite continued investments we believe the firm’s business model can generate margin improvement if our revenue outlook comes to fruition.
4Q13 bond issuance generally in line with expectations
Following a strong September, bond issuance slowed during October, then rebounded modestly during November before seeing its typical seasonal decline to close out the year. For the quarter, global non-financial investment grade bond issuance was down 8% from 3Q13 while high-yield issuance volumes were down 4% q/q. Global financial institutions issuance actually increased 7% q/q, with November being the second busiest issuance month of 2013.
Leveraged loans close out 2013 on high note
Global syndicated high-yield rate loan proceeds were up 32% in 4Q13 from 3Q13; November and December saw $90 billion raised, with only four months topping this number since at least prior to January 2009.
Structured finance mixed, but better than expected
Global asset-backed security (ABS) issuance was up 15% q/q (4Q13 was the strongest quarter of 2013) while global collateralized debt obligation (CDO) issuance saw a 26% q/q rebound. In addition, U.S. non-agency commercial mortgage-backed security (CMBS) issuance increased 54% from a slow 3Q13.
What to look for from Moody’s upcoming earnings release
- 2014 financial outlook, including expense projections and near-term capital return plans;
- outlook for issuance volumes during 2014, in particular structured finance; and
- update on competitive dynamics and revenue growth trends in the firm’s analytics businesses.
Estimates
We are increasing our 4Q13 non-GAAP EPS estimate to $0.78 from $0.75 to reflect modestly better than anticipated issuance, particularly within structured finance. Our 2014 and 2015 EPS estimates remain unchanged at $3.95 and $4.65, respectively.
Valuation
Our $82 target price reflects a blended average of a DCF analysis and a P/E-derived fair value estimate (see page 4). Our 20.0x target P/E applied against our forward earnings estimate one year hence of $4.50 is a meaningful premium to Moody’s Corporation (NYSE:MCO) three-year average forward P/E multiple of 15.5x but is consistent with the peer group average. In addition, it reflects a lower level of legal and regulatory risk than in prior years.
