Moody's Corp. (MCO) raised its fiscal 2012 forecast. While the top line remains similar to previous expectations (up 12% to 13% year over year compared to previous expectations of an increase in the low-double-digit percentage range). In dollar terms, the company expects revenues in the range of $2.55 billion to $2.58 billion, which is well above the Zacks Consensus Estimate of $2.53 billion. Moody's has also raised its pro forma earnings per share expectations to $2.70-$2.80 from prior estimates of $2.62-$2.72. The Zacks Consensus Estimate pegs Moody's fiscal 2012 earnings per share at $2.75, still above the guidance. Segment wise, global Moody's Investor Service ("MIS") is expected to increase in the high-single-digit percentage range (previously expected to increase in mid to high single digit percentage range). Domestic MIS revenue is expected to increase in the mid-teens percent range, up from earlier expectation of an increase in low-double-digit percent range. However, overseas MIS revenue is expected to increase in the low-single-digit range, which is consistent with previous expectations.

Revenue from Corporate finance is expected to expand in the mid-teens percent range (previously expected to increase in the high single-to-low double-digit percent range). Though Moody's had projected its revenues from structured finance to be flat on year-over-year basis for 2012, the company now expects revenues from the segment to increase in the mid-single-digit percent range. However, the company expects its revenue from financial institutions to remain flat, consistent with previous expectations.

However, Moody's has maintained its guidance on revenue from its analytics division, Moody's Analytics ("MA"). Domestic MA revenue is expected to increase in the high-teens to 20% range, while overseas revenue is projected to increase in the mid to high-teens percentage range. Research, data and analytics revenue growth is expected to be in the mid single-digit percentage range, while Enterprise Risk Solutions revenue is expected to be in the low 20% range. Professional services revenue is expected to grow approximately 75% for the full year.

The improvement in MA segment revenue expectation is backed by a growing client base and expansion in the regulatory requirements of banks and insurance companies. Moreover, Moody's is expected to benefit from the disintermediation of credit markets. Improvement in the debt market is also expected to be a positive catalyst for the company going forward. 

The company has plans to repurchase shares amounting to $300 million in fiscal 2012. Capital expenditures are expected to be in the range of $60.0 million to $70.0 million for fiscal 2012. Moody's expects depreciation to be approximately $100.0 million for the full year. Incremental compliance and regulatory expense is expected to be in the range of $10.0 million to $15.0 million for fiscal 2012.

Despite the increased guidance, we retain a Neutral recommendation on Moody's due to the sluggish U.S economy, the ongoing European debt crisis and concerns regarding the banking sector. Moreover, integration risks from acquisitions and increasing technology costs (due to Dodd-Frank implementation) are expected to be the headwinds going forward. Moody's faces stiff competition in most of the markets in which it operates. Additionally competition from Fitch, S&P rating services, Fiserv Inc. (FISV) and Dun & Bradstreet Corp (DNB) are the other near-term headwinds.

Nonetheless, we believe that Moody's remains a solid franchise in rating debt instruments based on its diversified credit research business model and international growth opportunities.

Moody's currently has a Zacks #3 Rank, which translates into a short-term Hold rating.



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Tickers in this Article: FISV, DNB, MCO

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