Moody's Corporation MCO is scheduled to report fourth-quarter and full-year 2016 results on Feb 17.
The company’s third-quarter 2016 earnings per share beat the Zacks Consensus Estimate and improved year over year as well. Results were driven by higher revenues, partially offset by increased expenses.
Notably, the company has recorded a positive earnings surprise in three of the trailing four quarters, with an average beat of 2.1%.
Our quantitative model doesn’t call for an earnings beat this time around. Here is why:
A stock needs to have the right combination of the two key criteria – a positive Earnings ESP and a Zacks Rank #1 (Strong Buy) or 2 (Buy) or at least 3 (Hold) – for increasing chances of an earnings beat. Unfortunately, this is not the case here, as elaborated below.
You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks ESP: The Earnings ESP of Moody’s is 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.12.
Zacks Rank: Moody’s Zacks Rank #3 increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise
Factors to Influence Q4 Results
Last month, Moody’s reached an $864-million settlement with the U.S. authorities to resolve claims tied with its credit ratings for residential mortgage-backed securities and collateralized debt obligations assigned during the financial crisis period.
Owing to the settlement, Moody’s expects an impact of about $702 million after-tax charge or around $3.62 per share to be recorded in its fourth-quarter 2016 results.
During the fourth quarter, issuance trends remained soft. Structured products issuance, particularly in the commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLO) markets were decent in the quarter. However, investment grade and high yield issuance remained weak. Also, strength in the U.S. dollar is likely to impact quarterly results to some extent.
Nevertheless, the credit rating giant’s results should reflect revenue growth on the back of its strategic acquisitions, which has increased scale and cross-selling opportunities across products and vertical markets.
Notably, for 2016, Moody’s has guided revenue growth in low-single digits. Further, the company projects capital expenditure of $120 million. Free cash flow is expected to be $1 billion.
For Moody's Investors Service, revenues are likely to be flat year over year while Moody's Analytics revenues are estimated to be up in mid-single digits.
Moody’s activities during the quarter were inadequate to win analysts’ confidence. As a result, the Zacks Consensus Estimate for the quarter remained unchanged at $1.12 over the last seven days.
Stocks that Warrant a Look
Here are some stocks worth considering, as they have the right combination of elements to post an earnings beat this quarter.
Hersha Hospitality Trust HT has an Earnings ESP of +2.04% and a Zacks Rank #3. The company is slated to release results on Feb 22.
MFA Financial, Inc. MFA has an Earnings ESP of +10.00% and carries a Zacks Rank #3. It is scheduled to release results on Feb 16. You can see the complete list of today’s Zacks #1 Rank stocks here.
Public Storage PSA will release results on Feb 22. It has an Earnings ESP of +1.14 % and carries a Zacks Rank #3.
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