S&P Global: Strong Business Characteristics Make Them A Buy At This Price

seekingalpha06-15

S&P Global provides solid business characteristics that include high switching costs, an asset-light structure, strong brand reputation, and inherent diversification by operating in many uncorrelated ...

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Currently, it is trading at its average multiple from recent years.The raise in company guidance, coupled with a potential exit from a low-synergetic business segment, makes it a buy at this price.   mixmotive S&P Global's  stock has barely moved in 2024, with a total return of -0.34%, which is a clear underperformance compared to the general market, which has gained 13.9% this year. Describing S&P Global in a single word is challenging. 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Currently, it is trading at its average multiple from recent years.The raise in company guidance, coupled with a potential exit from a low-synergetic business segment, makes it a buy at this price.   mixmotive S&P Global's (SPGI) stock has barely moved in 2024, with a total return of -0.34%, which is a clear underperformance compared to the general market, which has gained 13.9% this year. Describing S&P Global in a single word is challenging. Is it a rating agency, a financial data supplier, or an indices provider? Well, it's all of those.  In this analysis, I will briefly go through their business segments and revenue composition to display where the growth has recently been coming from. Next, I will discuss their recent acquisitions and potential divestments, along with their price action, valuation, and risks, to ultimately conclude with a buy rating for the stock. The Five Business Segments of S&P Global In the Financial Exchanges and Data industry, S&P Global takes the lead. Out of the 22 companies in the industry, is the one with the largest market cap ($137.8 billion) and the highest TTM revenue ($12.8 billion). Following the size, S&P Global is a broadly diversified business. They do credit ratings, license market indices, provide multi-asset data, and deliver insights for the commodity and automotive spaces. Last year, they even offered engineering solutions, but they sold that business line to KKR (KKR) for $975 million in cash. The engineering segment was created after the merger with IHS Markit in 2022 and consisted of an all-shares deal with a $44 billion valuation, which also opened the creation of the Mobility and Commodity Insights segments. FinChat Currently, what is weighting most of S&P Global's revenue is the Market Intelligence business (38%), which is predominantly subscription-based and includes recognized tools such as Capital IQ. Next comes the classical debt Ratings business (34.2%) that generates revenue from one-time fees when debt originations occur, but also from surveillance of credit quality. Following are Indices that account for 12.5% of the revenue and are mainly dependent on the level of AUM of funds licensing their Dow Jones or S&P indices. And from the side of the segments created post-merger, Commodity Insights and Mobility, constitute 18.0%, and 12.4%, respectively. FinChat One special characteristic that I find extraordinarily appealing about data vendors is the fact that most of their revenues come from subscriptions. In the case of S&P Global, it is not as high compared to MSCI (MSCI) due to the diversification of the business, but with 50.9% of the revenue coming from subscriptions, it remains an appealing characteristic to me and is also their major revenue type contributor. Also, what's good about this is that recurring revenue levels remain high, and therefore the customer lifetime value is usually of many years. In Q1, 95.3% of the revenues were recurring, which represents a +50 bps increase from the year prior. For S&P Global, for example, a data services solution such as Capital IQ which is used by many market participants, bankers, insurance companies, public institutions, and more, has highly embedded switching costs to an organization. Switching from data providers would result in a long adaptation process for their employees and would most likely require formulas from old models to be adjusted. After subscriptions, transaction revenue is the second largest component (22.7%), which mainly comes from debt ratings and for the most part is credit cycle dependent on loan originations. SPGI Segment Growth FinChat From the top-line growth side, currently, the sector that has been growing the most is Ratings with a YoY growth of 28.9% in Q1. This growth was explained by an increase in debt issuance volume due to higher refinancing activity. From there, Indices follow at a growth rate of 13.5% thanks to higher revenues from asset-linked fees due to higher equity market valuations. While their main segment, Market Intelligence, was the one that exhibited the slowest amount of growth at 6.6% YoY. In a way, due to the positioning of Capital IQ in the market, I see this segment experiencing modest top-line growth in the next three years, but with tremendous characteristics of holding a large number of customers with elevated LTV metrics. Q1 SPGI Earnings Supplement Going forward, the company has raised guidance in the general revenue growth and increased its growth forecast in the Ratings and Indices segments, from the previous projection. In this case, those two segments were by coincidence the ones that in Q1 exhibited the highest YoY top-line growth. Overall, for 2024, management expects revenue growth from 6% to 8% with an EBIT expansion of 100 to 150 bps. Acquisitions and Divestitures Recently the company has announced some acquisitions and divestitures that followed after the merger with IHS Markit.  S&P Global agreed to acquire Visible Alpha, which is a financial provider mainly known for gathering sell-side estimates and then providing a consensus appraisal. For example, here on Seeking Alpha, many news editors cite Visible Alpha when they want to discuss market consensus estimates. This integration would allow to enhance investment research capabilities on Capital IQ and continue to compete more closely with the Bloomberg Terminal. Other recent acquisitions came from the side of ChartIQ, Market Scan, and TruSight to enrich Capital IQ, automotive pricing, and third-party and risk management capabilities.  The same day of the announcement of the acquisition of Visible Alpha, S&P Global also revealed the intention of exploring strategic opportunities for Fincentric, which is a digital provider focused on solutions for web and mobile development for some of the largest retail brokers and financial institutions. In addition to this, there are rumors that the company is exploring the possibility of selling its Mobility business, which generated $1.449 billion in TTM revenue in Q1, and the unit could be valued at more than $12 billion or 8.28x sales. If divestitures in the Mobility segment and Fincentric materialize, they would account for three sales of businesses coming from the IHS Markit merger in less than two years. In a way, Mobility is a segment that provides little synergies with the rest of the company which is mainly tailored towards financial data. At the same time, is the fourth out of five business segments in terms of operating margin at 38.6% TTM, so then it would make sense to divest and take away part of their conglomerate discount in business valuations. SPGI Stock Price Action Data by YCharts Even though S&P Global has been a clear outperformer in longer timeframes, over the last year, the stock has underperformed the general market by -10.9% from a total return perspective. Simultaneously, peers such as Moody's Corporation (MCO) have diverged from S&P Global's return after announcing strong Q1 earnings. Contrarily, MSCI's stock dipped after reporting disappointing Q1 earnings. Overall, these are all companies in the financial data industry that have vastly outperformed the market over the past 10 years and have obtained similar returns against the S&P 500 in a 5-year time frame that has been characterized by heavy weightings in tech stocks with multi-bagger performances. Data by YCharts S&P Global Valuation Data by YCharts Adjusting the historical multiple ratios period after the merger with IHS Markit was fully reflected in the financial statements, gives an average of a normalized PE ratio of 50.2x and a price-to-cash flow ratio average of 39.8x. As seen in the graphs above, the PE stands close to where the stock is currently trading, and for the price-to-cash flow, it stands 4.51 points below the average level, which represents an 11.3% margin of safety based on the free cash flow metric.   Author's compilations | Data: Seeking Alpha Moving on, when using P/E GAAP TMM and Price/ Cash Flow of P/E (as proxies to the aforementioned multiples), it can be seen that SPGI stands in the highest percentiles of these figures and falls significantly above the median. Taking both the historical multiple and the peer group results, I will give more weight to the historical multiples to conclude that the stock is fairly valued. I believe the historical multiple is better able to incorporate embedded premiums in the stock that most likely other companies in the peer group do not encounter. SPGI Share Buybacks Data by YCharts Eliminating the full-stock merger with IHS Markit in early 2022, S&P Global has demonstrated to be a shareholder-friendly company by rolling ongoing share buyback programs through the years, and preferring debt and retained earnings financing rather than issuing more shares. Currently, share buybacks represent 2.40% which combined with their forecasted dividend yield of 0.83% adds to a shareholder yield of approximately 3.23%. Risk of S&P Global Although I believe this is a highly resilient business due to its reputation in many of the verticals, I am going to speculate about the risk of not adapting its technology with the Gen AI revolution successfully. For a short period, I used Capital IQ to screen for M&A history, and a former college showed me in the early days of ChatGPT how there the process was significantly faster, especially when finding deals of businesses with specific characteristics or offerings. But here I don't expect the company to not adapt or remain with their hands crossed in Gen AI integration. For example, the company is reacting and in February they launched a generative AI search on their Global Marketplace. In this risk discussion, I am just pointing out the fact that the company may potentially be outpaced by the competition in the next decade, but not because I believe they are in trouble.  Other more obvious risks to consider are their Credit and Indices business. Although these have tremendous levels of reputation and recognition, in the end, they are structured to be market and economy sensitive. Higher levels of debt originations and higher asset valuations help these segments, and the contrary occurs when market valuations and debt offerings are low. But again, this is a company that is well diversified to the point that if one gets hit, others mitigate that effect. Takeaway  To conclude, S&P Global, for me, is a buy. They have a business that generates revenue from many sources, mostly in the form of subscriptions, with elevated levels of recurring revenue. Their brand reputation and offerings, with high switching costs, give them a moat and characteristics for a long-term investment. 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