Moody’s Rallies on Higher Earnings Amid Government ScrutinyMatt Robinson
Moody’s Corp. rallied after reporting quarterly profit that beat analysts’ estimates even as the owner of the second-largest ratings company faces lawsuits over its grades leading up to the financial crisis.
Fourth-quarter net income rose to $236.3 million from $206.7 million a year earlier, the New York-based company said today in a statement. Profit excluding certain items was $1.12 a share, exceeding the 95 cent average estimate of 10 analysts in a Bloomberg survey.
Shares rose 5.1 percent to $98.04 in New York trading, the highest level since Dec. 24, according to data compiled by Bloomberg.
The earnings announcement comes as the Justice Department is seeking to advance its probe into Moody’s rating methodology during the U.S. housing boom. Ray McDaniel, chief executive officer, said on a conference call that there was “nothing new to report” on any of the current government or potential cases its facing.
“We defend ourselves vigorously in any ratings-related litigation and are very reluctant to settle,” McDaniel said in a telephone interview.
While uncertainty remains over possible lawsuits, business is booming. Issuance of company bonds, Moody’s largest ratings segment by revenue, climbed to a record $4.1 trillion last year as issuers took advantage of borrowing costs near record lows. Debt sales in the three months ended in December rose to $881.9 billion from $867.9 billion in the year-earlier period, according to data compiled by Bloomberg.
Revenue in the quarter climbed 13 percent to $877.5 million from $779.2 million a year earlier, Moody’s said. Sales at Moody’s Investors Service, the credit-ratings unit that accounts for about 70 percent of the firm’s revenue, rose 7 percent to $565.1 million, the company said. The company expects revenue to increase in the “mid-single-digit percent range” in 2015, below last year’s forecast, and record high adjusted earnings per share between $4.55 to $4.65.
Revenue from grading company-bond sales increased 8.5 percent to $263.3 million, while ratings on structured-finance debt rose 9 percent to $118.5 million, according to the statement. Sales from Moody’s Analytics, which distributes research and data, gained 23 percent to $312.4 million.
“It’s a great quarter,” Ed Atorino, an analyst with Benchmark Co., said by phone. “This company is a cash machine. Lawsuits are an expense for these guys.”
Over the last three months, Moody’s shares have trailed rating company McGraw Hill Financial Inc., whose Standard & Poor’s unit wrapped up dozens of government lawsuits this week in a $1.5 billion accord. Moody’s stock had fallen 5.8 percent since November through yesterday. That compared with a 6.6 percent rise in McGraw Hill to $95.88.
Regulator attention is now shifting to Moody’s after the settlement with S&P. Moody’s is facing lawsuits from Connecticut and Mississippi that allege its ratings during the run-up to the financial crisis were affected by business concerns -- an allegation that S&P initially denied but acknowledged this week.
Connecticut is picking up its case again after it was frozen during S&P settlement talks with the Justice Department, said Jaclyn Falkowski, a spokeswoman for Connecticut Attorney General George Jepsen. Moody’s is also facing a lawsuit from the California Public Employees’ Retirement System, the largest U.S. state pension fund, over losses on three structured-investment vehicles, according to a regulatory filing.
“We continue to believe the cases are without merit,” said Michael Adler, a Moody’s spokesman.
The Justice Department is seeking to advance its more than five-year-old probe into Moody’s. Former executives at the company have been interviewed recently about the New York-based firm’s conduct in the run up to the credit crisis, according to three people with knowledge of the matter. It’s unclear whether the probe will result in a lawsuit, and any action against the company wouldn’t be imminent, one of the people said.
Warren Buffett’s Berkshire Hathaway Inc. is one of Moody’s biggest shareholders, with an 11.8 percent stake valued at about $2.3 billion, Bloomberg data show.
McGraw Hill is scheduled to report fourth-quarter earnings Feb. 12.