SPGI - S&P Global: Share Price Dip A Buying Opportunity For Long-Term Investors

2023-07-31 01:01:05 ET

Summary

• S&P Global's 2Q23 sales increased 4.4%, with growth in Ratings, Commodity Insights, Mobility, Market Intelligence, and Indices.
• S&P forecasts mid-teens growth for Ratings in the second half of 2023, lower than MCO's projection.
• Despite regulatory and political uncertainties, SPGI's diversified business model and strong growth in segments make it a compelling long-term investment.

Summary

Readers may find my previous coverage via this link . My previous rating was a buy as I believed S&P Global ( SPGI ) remains a great business, and I continued to remain optimistic that the Ratings segment will improve in the coming quarters. I am reiterating my buy rating for SPGI as I continue to be positive about the Rating segment's performance. The recent share price dip represents an attractive opportunity for long-term investors to purchase the stock.

Financials/Valuation

SPGI's 2Q23 sales increased 4.4% to $3.1 billion, with growth in Ratings revenue (7%) and robust showing from Commodity Insights and Mobility (8-10% growth), Market Intelligence (6% growth), and Indices (3% growth). Bottom line: SPGI's adjusted EPS for 2Q23 was $3.12.

S&P now forecasts that Ratings' full-year billed issuance would increase 4 to 8% y/y in 2023, predicting growth in the mid-teens for the second half of the year. This is below what Moody's ( MCO ) is projecting low 20% y/y growth in 2H23). With a stronger transactional issuance backdrop offsetting lower Initial Credit Rating [ICR] revenues, management is now anticipating Ratings revenues to climb 5-7% y/y for FY23, an increase of 100bps at the midpoint from prior expectations. I think SPGI's management is being more cautious by forecasting for lesser growth compared to MCO, which leaves possibility for upside surprise.

SPGI segment revenues in Market Intelligence increased 5.5% on an FX neutral basis in 2Q23. Adj operating margin, however, was a letdown, dropping 60 bps to 32%. While the segment's margin was somewhat below expectations, I'd want to point out that the firm-wide impact of incentive compensation accruals was seen across all segments in 2Q23, not just this one. Management now anticipates MI revenues to climb 6-8% y/y for the full year 2023, with margins in the range of 33.5-34.5 percent. The previous forecast called for revenue growth of 6.5-8.5% and margins of 34-50%; these numbers have been slightly lowered.

Based on my view of the business, SPGI should be able to grow EPS by 10% over the long term. This 10% is supported by the high end of the mid-single digit range, margin expansion as it scales further, and share buybacks. This 10% is also in line with the historical growth rate between 2012 and 2022. With my assumptions, SPGI is worth $479.20.

Comments

In my opinion, SPGI's reported 2Q results were more positive than negative. First, Ratings revenue performance was encouraging because it tracked with my expectations; I anticipate issuance will continue to be a tailwind in the second half of the year as central bank rate hikes draw to a close. In my opinion, SPGI's non-Ratings businesses as a whole are doing rather well, providing the company with both stable earnings streams and revenue growth synergies. Notably, Mobility remains SPGI's fastest growing segment, thanks to brisk new business growth in CARFAX, the successful upselling of current clients on value-added services and high underwriting volumes. Furthermore, through bundling and product innovation in areas such as sustainability, Commodity Insights is maintaining strong growth and remaining resilient against a step-down in oil prices, consistent with Platts' historical performance. Finally, synergies from the IHS Markit merger are being realized by SPGI. Through 2Q23, run-rate cost synergies had reached $574 million, comparing very well to the $600 million objective set for 2023, while run-rate revenue synergies had reached $68 million (already ~20% of target set for 2026). I also think SPGI's projects involving generative AI, such as its new ChatIQ tool, will generate positive segment-level revenue and margins.

However, regulatory and political uncertainty are a headwind that is slowing the market for products related to sustainability and the energy transition. Third-quarter margins will likely be subdued as a result of the normalization of incentive compensation spending, but they should surge in 4Q as a result of lowering comps. Overall, I still think SPGI is a great long-term investment and am maintaining my Buy recommendation. I think this is a great time to buy, especially after the price dropped so sharply after earnings were released.

Conclusion

SPGI presents a compelling buying opportunity for long-term investors. Despite a recent share price dip, the company's overall performance in the second quarter was positive, with growth in various segments, particularly Ratings and Market Intelligence. The management's cautious approach in forecasting suggests potential for upside surprises in the future. Though regulatory and political uncertainties remain headwinds, SPGI's diversified business model and strong growth in segments like Mobility and Commodity Insights provide stability and growth potential. Moreover, the realization of cost and revenue synergies from the IHS Markit merger further supports the positive outlook. Considering these factors and the historical growth rate, SPGI appears to be undervalued and worth $479.20. Thus, I maintain my Buy recommendation, believing that the recent price drop creates an excellent opportunity for investors to acquire shares in a promising company with long-term growth potential.

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