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With two big debt underwriting banks posting Q3 results on Friday, Oppenheimer analyst Owen Lau looked at what that means for two publicly traded U.S. credit ratings firms — S&P Global (NYSE:SPGI) and Moody’s (NYSE:MCO).
“After unpacking JPMorgan’s (JPM) and Morgan Stanley’s (MS) earnings results, we maintain our cautious view on Q322 Ratings revenues for SPGI and MCO,” Lau wrote in a note.
On a Y/Y basis, debt capital market revenue fell 40% at JPMorgan and 35% at Morgan Stanley. Oppenheimer’s estimate for S&P Global’s (SPGI) Ratings revenue was for a 32% decline, and for Moody’s (MCO), a 30% drop.
That’s a bigger decline than the consensus estimates of -28% for SPGI’s Ratings revenue and -27% for MCO’s Ratings revenue. Those “appear to be a bit optimistic, and there could be a downside risk,” Lau said.
Both companies rate publicly traded debt issued by corporations,, municipalities, and governments. The ratings are important for the debt issuers because the higher their rating, the lower their borrowing costs will be. But as most central banks hike interest rates to combat inflation, the cost of borrowing increases, reducing demand for new debt offerings.
Against the background of reduced activity in debt issuance, expense control becomes especially important for both companies, he said. Currently, he doesn’t expect either to shrink their employee base, even as it focuses on other areas like SG&A and bonuses. “If SPGI and MCO can manage the expense better than expected, it can be an upside to our estimates,” Lau said.
For the year through Oct. 14, 2022, JPMorgan (JPM) held the top spot among global banks in debt capital markets revenue, with $357.18B, and Morgan Stanley (MS) was in fourth place, with $340.81B, according to Dealogic data.
Lau doesn’t expect upbeat outlooks in the near term from either company due to the weak issuance and soft equity market. “While we are still cautious for the near term, SPGI and MCO are high-quality stock supported by strong secular tailwinds,” he said.
He has Outperform ratings on SPGI and MCO as their valuations have declined to “attractive levels for long-term investors.”
Moody’s is scheduled to release Q3 earnings on Oct. 25, and S&P Global (SPGI) plans to issue Q3 results on Oct. 27.
Looking at consensus estimates for Q3: MCO is expected to report revenue of ~$1.37B vs. $1.53B reported in Q3 2021; SPGI is expected to see Q3 revenue of $2.93B vs. $2.09B reported in Q3 2021.
The SA Quant system, which historically outperforms the broader market, has Sell ratings on both S&P Global (SPGI) and Moody’s (MCO).
SA contributor The Value Investor, with a Hold rating on Moody’s (MCO), explained that the company had benefited from active markets in 2021, but is hurting now as that reversed.
