Morgan Stanley Thinks Brexit Has Blown Over For Moody's

Morgan Stanley still prefers Moody's Corporation MCO over S&P Global Inc SPGI on valuation and said the credit environment proving calmer than many anticipate three weeks post-Brexit.

Moody's reported higher mix of ratings profits and transactional revenue vs. S&P Global; however, Moody's shares initially fell more (14 percent vs.10 percent), although both have since rebounded beyond pre-Brexit levels.

"[W]e still prefer Moody's based on current valuation and the potential for upside from upcoming IG and HY debt maturities," analyst Toni Kaplan wrote in a note.

Kaplan, who has an Overweight rating on Moody's, expects earnings beats from both names, as the second-quarter issuance is mixed, but better than the more negative outlook that was seen after the first quarter.

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"Corporate issuance was flowing flat to slightly positive in 2Q, which is a notable improvement for high yield after four consecutive quarters of double-digit revenue declines. Structured issuance continued to be weak, however, driven by soft CMBS, CLOs and CDOs," Kaplan noted.

Kaplan raised the second-quarter EPS view of Moody's by $0.03 to $1.32 and S&P by $0.02 to $1.40. For FY16, Kaplan maintained his EPS estimate of Moody's at $4.62, while raising S&P EPS estimate by $0.09 to $5.18, primarily on forex. The analyst remains Equal Weight on S&P.

"We estimate that the weakening of the GBP and Euro this quarter will be a ~$0.09 tailwind to SPGI and a ~$0.07 tailwind to MCO NTM. Both firms should benefit from having large cost bases in the U.K. with the weakening GBP, but this will be somewhat mitigated by the revenue impact from a softer Euro," Kaplan added.

Kaplan raised the price target of S&P by $5 to $120, while maintaining Moody's target price at $114.

At time of writing, shares of Moody's were up 0.43 percent to $103.78 and S&P were up 0.69 percent to $116.44.

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