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Morningstar | Moody's Ratings Revenue Weighed Down by a Flattening Yield Curve; Analytics Outperforms

Wide-moat Moody’s demonstrated the resilience of its business in the first quarter, with declines in its ratings business mostly offset by advances in Moody’s Analytics. For the quarter, the company generating earnings of $1.93 per share on revenue of $1.1 billion, both small increases from the previous year. Global debt issuance decreased 14% in the first quarter to $1.2 trillion, providing a substantial headwind to Moody’s revenue. However, within MIS, Moody’s ratings segment, revenue was down only 7%, demonstrating the strength of the company’s moat and ability to raise pricing to offset weakness in issuance. We anticipate that Moody’s will accelerate growth for the remainder of the year, as the final three quarters of 2018 saw substantially weaker debt issuance, providing easier comps for the company.

Moody’s Analytics was a bright spot for the company in the quarter. Revenue increased 16% from 2018, which included $11.4 million in acquired revenue. Even after excluding the contribution of acquisitions, Moody’s Analytics still saw organic revenue growth of 13%. Finally, management affirmed its previous guidance of mid-single-digit revenue growth and GAAP earnings of $7.30 to $7.55 per share. For now, we have no reason to change our fair value estimate of $196 per share.

Management attributed MIS’ negative growth to a flattening of the yield curve, which shifted investor preference from floating- to fixed-rate securities. This was especially evident in bank loans, which saw a 33% year-over-year decline in issuance. During the call, management said the biggest risk to issuance forecasts of 0%-5% declines would be continued weakness in bank loans. We’re forecasting MIS revenue growth of only 2% in 2019. However, even if issuance disappoints, it doesn’t give us too much concern, since debt markets are cyclical and issuers have the tendency to herd when deciding when to issue bonds and refinance debt.

Drilling down on Moody’s Analytics, the company’s 2017 acquisition of Bureau van Dijk appears to be performing well. Specifically, management attributed much of the 15% growth in research, data, and analytics to Bureau van Dijk. This gives us added confidence that Moody’s will be able to sell acquired products alongside current offerings or incorporate its more recent acquisitions into existing products. That’s why we’re interested in Moody’s recent acquisition of a majority stake in Vigeo Eiris, a provider of environmental, social, and governance research and data. Though Moody’s didn’t disclose a price, this deal makes a lot of sense to us. Increasingly, investors, especially European investors, are providing ESG data to regulators and clients. In addition, under the European Union’s proposed ESG framework, issuers may be required to disclose this data to regulators and investors. Vigeo Eiris will be included within MIS and we believe may facilitate cross-selling and possibly enable Moody’s to raise prices on issuers that may be forced to disclose this data. While we’re not aware of a standard for ESG ratings within fixed-income or private-company issuers, MSCI is on its way to being the standard within global equities. Moody’s hasn’t made as much progress as MSCI, but nevertheless, it’s an interesting goal to pursue within bond ratings.