Weak Bond Issuance Backdrop To Mar Moody's (MCO) Q4 Earnings

Moody's (NYSE:MCO) is slated to announce fourth quarter and 2018 results on Feb 15, 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, slightly dovish stance of the Federal Reserve, expectations of economic slowdown in the United States and the trade war weigh on the global debt issuances.

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

Given the disappointing performance of these business lines, revenue growth in the MIS division is expected get hampered in the to-be-reported quarter.

Notably, on expectations of soft debt issuance in the fourth-quarter 2018, management lowered full-year 2018 guidance for the MIS division. Revenues for the division are now likely to increase in the low-single-digit percent range, down from prior guidance of mid-single-digit percent range rise.

Other Factors to Impact Q4 Results

Moody's Analytics (“MA”) division to report higher 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 a rise in revenues. Also, its MA division will benefit from revenue growth backed by strategic acquisitions and investments.

For 2018, Moody’s anticipates MA revenues to grow in the low-20s percent range.

Expenses to remain high: Given Moody’s inorganic growth strategy, acquisition and restructuring costs are expected to remain high. Hence, overall expenses are likely to rise during the quarter.

Further, in response to the slowdown in bond issuances, Moody’s started a cost management initiative, which will result in restructuring charge of $30-$40 million for the fourth quarter.

For 2018, management expects operating expenses to rise in the high-single-digit percent range.

Earnings and Sales Growth Expectations

The Zacks Consensus Estimate for earnings of $1.71 for the to-be-reported quarter has been revised 1.2% lower over the past 30 days. Nonetheless, the figure reflects year-over-year growth of 13.3%.

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For 2018, Moody’s expects adjusted earnings to be in the range of $7.50-7.65 per share and GAAP earnings to be $6.95-$7.10 per share.

The consensus estimate for quarterly sales of $1.15 billion reflects 1.2% year-over-year fall.

For 2018, sales are expected to be $4.53 billion. Notably, Moody’s projects revenues to increase in the high-single-digit percent range.

Earnings Whispers

Per our quantitative model, chances of Moody’s beating the Zacks Consensus Estimate in the fourth quarter are low. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP Filter .

Earnings ESP: Earnings ESP for Moody’s is -3.15%.

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.