Capital Market Earnings Crashout
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What is the main topic discussed in this episode?
Digesting today's earnings duds on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, Lou Whiteman and Matt Frankel. So, earnings season is in full swing here. We got a whole bunch of companies reporting, even related to the oil market. We're going to touch into Halliburton's earnings, but more on like a state of the oil market sort of analysis. We'll also hit in the mailbag. But today, we're going to start with the two companies that reported earlier this morning. And we could say were the duds of the earnings reports so far because they were MSCI and Equifax. Shares of both stocks were down more than 10% in pre-market trading.
And as of we're recording right now, MSCI is still down about 11%. Equifax is down about almost 7%. So, obviously, the market didn't like what they were seeing. The funny thing was, as I was looking at the results, just as a cursory glance before I got to talk to you guys, is it looked like they both posted improving results. And even MSCI's earnings per share was up almost 20%. So, guys, what happened here? I mean, Matt, I know you looked at Equifax. Lou, you looked at MSCI. What was going on?
Yeah, and I mean, Equifax earnings, on the surface at least, were not a dud. I mean, 11% year-over-year revenue growth, earnings per share grew 13% on an adjusted basis and beat estimates. Revenue from the U.S. mortgage business is up 25%, which is nice to see given the state of the mortgage market. The company actually doubled its AI-driven cost reduction estimate to $150 million through 2028. Cost reductions are a good thing. The stock was down, like you said, double digits in pre-market. It's rebounded a little bit, but it's still down despite the earnings beat. A few potential reasons and things to flag here. There was a $100 million charge related to a credit miscalculation glitch that happened in 2023.
Gap earnings were down 4% year over year as a result, so that's worth noting. The adjusted EBITDA margins actually fell in all of the segments of the business year over year. Essentially, rising compensation costs, incentives, they're both rising faster than revenue. And most importantly, there's no easier way to make a stock go down than to lower your guidance. And while they didn't really lower their guidance, they kept their full year. The third quarter guidance was a little softer than expected.
Why did Equifax and MSCI stocks plunge despite seemingly solid earnings?
The adjusted EPS estimate would actually represent a sequential decline. And investors aren't thrilled. So really, this was a solid quarter. with a disappointing outlook and margin trends that seem to be scaring investors.
Kind of a similar story over at MSCI. I don't know if people know this one as well. This former Morgan Stanley unit, it's a market data and analytics company separate from Morgan Stanley now. They grew revenue and earnings by double digits. The earnings number was a little light relative to expectations. Guys, I'm tempted to blame AI here. The company said that expenses were up 9% primarily due to, quote, higher IT costs, among other expenses. So You know, maybe they are adding to their tech stack. There are also some accounting things going on. They recognize some amortization on related acquisitions. Tyler, as you said, stock is down double digits. The market just has this one wrong, period. I'm just going to say it.
Company is in growth mode. It launched twice as many products in the first half of 26 as it did in all of 2024. Growing does come with costs. The costs are investment in the business. There's nothing wrong with the core business here.
I want to pick at something a little bit because reading through the lines of both of these, you know, Matt, Equifax says that, you know, these AI-driven cost reductions of $150 million, but then their margins were down. Lou, as you said, like the higher IT costs, it's all kind of like... Some of it seemed to me implying like, you know, tech costs, IT costs, AI costs, token, whatever costs you want to associate with, you know, using AI in their business seems to be rising.
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Chapters
5 chapters
1
What is the main topic discussed in this episode?
0:02–2:30
2
Why did Equifax and MSCI stocks plunge despite seemingly solid earnings?
2:30–5:13
3
What specific issues drove Equifax’s margins down after an earnings beat?
5:13–13:01
4
How are AI and higher IT costs impacting MSCI’s profitability?
13:01–17:45
5
Will AI spending be a temporary investment or an ongoing cost headwind for data companies?
17:45–23:42