Soft Bond Issuance Volume To Hurt Moody's (MCO) Q1 Earnings

Moody's (NYSE:MCO) is slated to announce first-quarter 2019 results on Apr 24, before the opening bell. Weakness in global corporate bond issuance during the quarter is expected to weigh on the company’s Corporate Finance line — the largest revenue contributor to the Moody's Investors Service (“MIS”) division.

Rising interest rates seem to have slowed down companies’ involvement in debt issuances to some extent. Apart from this, several other factors including growing concerns related to high corporate indebtedness, dovish stance of the Federal Reserve, expectations of economic slowdown in the United States and the trade war weigh on the global debt issuance volume.

Though high yield bond and investment grade bond volumes were healthy, leveraged loan issuance was not impressive during the quarter. Further, quarterly issuance volume for commercial mortgage-backed securities was decent, while collateralized loan obligations and asset backed securities was dismal. So, Moody’s will likely witness weak growth in Structured Finance revenues.

Given the disappointing performance of these business lines, overall revenues in the MIS division are expected get adversely impacted in the to-be-reported quarter.

Other Factors at Play

Moody's Analytics (“MA”) division to support revenues: Moody’s continues to pursue growth in areas outside the core credit ratings service. Given the rise in demand for analytics, the company’s MA division is expected to witness revenues rise. Also, the division will benefit from revenue growth backed by strategic acquisitions and investments.

Expenses to remain high: Given Moody’s inorganic growth strategy, acquisition and restructuring costs are expected to remain high. Hence, overall first-quarter expenses are likely to be elevated.

Further, in response to the slowdown in bond issuances, Moody’s started a cost management initiative, which might result in restructuring charge.

Here is what our quantitative model predicts:

Chances of Moody’s beating the Zacks Consensus Estimate in the first quarter are low. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: Earnings ESP for Moody’s is -1.69%.

Zacks Rank: Moody’s currently carries a Zacks Rank of 3, which increases the predictive power of ESP. But we need to have a positive Earnings ESP to be sure of the positive surprise.

The Zacks Consensus Estimate for earnings of $1.88 for the to-be-reported quarter has been revised 1.1% lower over the past 30 days. Also, it indicates a decline of 6.9% from the year-ago reported figure. The consensus estimate for sales of $1.13 billion suggests a marginal rise of 0.3%.

Stocks to Consider

Here are a few bank stocks that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat in their upcoming releases:

BankUnited, Inc. (NYSE:BKU) has an Earnings ESP of +1.89% and carries a Zacks Rank of 3 at present. The company is slated to release results on Apr 24.

SVB Financial Group (NASDAQ:SIVB) is slated to release results on Apr 25. It has an Earnings ESP of +0.42% and currently carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Associated Banc-Corp (NYSE:ASB) is scheduled to release results on Apr 25. It presently has an Earnings ESP of +0.55% and a Zacks Rank #3.

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