2023-12-18 15:41:18 ET
Summary
- S&P Global has seen a 30% total return on its shares this year, making it one of the best performers in the market.
- The company reported an 11% revenue growth rate in 3Q23, driven by a well-executed strategy and margin expansion.
- S&P Global expects to achieve its medium-term targets of 7-9% organic revenue growth for 2025 and 2026, despite short-term volatility.
Introduction
It's time to talk about S&P Global ( SPGI ) , a company that almost needs no introduction.
My most recent article on this impressive company was written on June 8, which means it's time for an update. Since then, a lot has happened, including a 15% total return of SPGI shares, making it one of the best performers this year.
Year-to-date, SPGI shares are up 30%, excluding dividends. This makes the company the sixth-best performer in the S&P 500 financial sector. The weighted average performance of financial stocks ( XLF ) is 9.2% year-to-date.
In this case, SPGI's rally isn't just fueled by Fed rate cut expectations and hopes that we're on a path back to an environment of subdued inflation and rates but also by its ability to grow its business.
As we'll discuss in this article, the company is expected to maintain double-digit EPS growth, supported by increasingly favorable market conditions and the company's ability to increasingly penetrate a highly fragmented financial services market.
So, without further ado, let's get to the details!
S&P Global Sees Growth Across The Board
I use S&P Global services almost every single day. I use its ratings in my articles and research, I read its market comments whenever possible, and I know some of its leading researchers who publish fantastic reports on economic topics like Purchasing Manager Indices, energy, supply chains, and so much more.
As a matter of fact, the biggest chunk of its revenues comes from non-rating activities.
USD in Million | 2021 | Weight | 2022 | Weight |
---|---|---|---|---|
Market Intelligence | 2,247 | 27.1 % | 3,811 | 34.1 % |
Ratings | 4,097 | 49.4 % | 3,050 | 27.3 % |
Commodity Insights | - | - | 1,685 | 15.1 % |
Indices | 1,149 | 13.8 % | 1,339 | 12.0 % |
Mobility | - | - | 1,142 | 10.2 % |
Engineering Solutions | - | - | 323 | 2.9 % |
Intersegment Elimination | -146 | -1.8 % | -169 | -1.5 % |
The company is positioned so well that it is growing, even in a market of elevated rates.
In the third quarter of 2023, S&P Global delivered a stellar financial performance.
The company reported an impressive 11% revenue growth rate, excluding the impact of Engineering Solutions.
According to the company, this growth was underpinned by a well-executed strategy, including decisive actions taken in the second and third quarters of the previous year to protect margins.
S&P Global
Despite facing headwinds from expense growth, S&P Global managed to expand margins by approximately 100 basis points.
Thanks to these numbers, adjusted earnings per share increased by 10% year-over-year.
The strong financial results were attributed to continued innovation and execution, with a rapid pace of product launches throughout the quarter.
During the earnings call, S&P Global emphasized the importance of exploring the multitude of new products and features introduced during this period.
S&P Global
The financial markets service industry is incredibly competitive, which means that service innovation is what makes or breaks a company.
In the case of S&P Global, the Vitality Index, representing revenue derived from new or enhanced products, reached 12% of total revenue, which proves the successful generation of value from innovative offerings.
S&P Global
Furthermore, the company highlighted ongoing AI initiatives and committed to providing a more comprehensive update on progress in the next quarter.
In customer conversations, particularly in private markets, sustainability, and energy transition, S&P Global noted a positive trend leading to larger deals. The strategic emphasis on private markets and sustainability yielded meaningful revenue growth in these areas during the quarter.
This also allowed the company to present an upbeat outlook, as it narrowed expectations for total revenue growth to a range of 4.5% to 5.5% for the full year.
The company maintained its operating profit margin guidance range of 45.5% to 46.5%, reflecting confidence in maintaining a balance between disciplined expense management and strategic investments.
S&P Global
The company's economists forecasted global GDP growth of 3.1% in 2023. The economic outlook included expectations of subdued global growth fueled by higher-for-longer rates, with a soft landing base case assumption in the first half of 2024.
Furthermore, S&P Global anticipates inflation to remain above central banks' target rates, and energy commodity prices, including Brent crude, are expected to stay above historical averages.
S&P Global
As most of my readers may know, that's also what I expect.
The Outlook Remains Strong
During this month's Goldman Sachs U.S. Financial Services Conference , the company elaborated on its outlook and how it expects to grow in the future.
Despite a strong economic performance this year, a slowdown is anticipated in the first half of the following year.
Factors contributing to this include the depletion of excess household savings from the pandemic, the resetting of borrowing rates, and an expected increase in real interest rates.
The prediction includes a potential reduction in GDP growth but anticipates an uptick in employment, credit losses, and a clearer outlook on the Fed's path.
What's interesting is that the company believes that a clearer outlook and slower economic growth could be positive for S&P Global's market-sensitive businesses.
Clarity around the yield curve is crucial for debt markets and issuance activity, benefiting market-sensitive sectors like equity capital markets and M&A activities.
Looking beyond 2024, the company affirmed that it remains on track to achieve its medium-term targets of 7% to 9% organic revenue growth for 2025 and 2026.
Despite short-term volatility and uncertainties in the macroeconomic and geopolitical landscape, the company believes in the underlying secular trends supporting its businesses.
The company has also made substantial progress in cost synergies, surpassing the 80% target on a run-rate basis.
Meanwhile, revenue synergies, focused on cross-selling initially, have reached one-third of the $350 million target. The next phase involves new product development, supported by platforms like Platts Connect in Commodity Insights and Entity Insights in Market Intelligence.
S&P Global
With regard to ratings, the Ratings business of the company has outperformed its competitors for three consecutive quarters.
The growth is attributed to strategic decisions, including preserving analytical capacity, a mix shift in structured finance areas, and a focus on serving customers well.
Going forward, the company expects a massive volume of refinancing activity in the next 3-5 years, totaling $8 trillion and $13 trillion, respectively.
The company anticipates the refinancing pipeline to evolve, with high-yield and investment-grade categories both showing strength.
To give you an example, this is what maturing commercial mortgage debt looks like:
CRED IQ, MBA
Not only is this great news for rating demand, but it is also one of the reasons why I'm very careful in this environment.
Imagine if this wave of maturing debt hits companies in an environment of elevated rates. I expect that this could do a lot of economic damage - unless the Fed is able to rapidly cut rates without causing a second wave of inflation.
Valuation
The bad news for investors is that SPGI yields just 0.8%. However, this dividend comes with a 30% payout ratio, a five-year CAGR of 12.5%, and consistent dividend growth.
Looking at the overview below, we see that it scores very high on safety, growth, and consistency.
The only bad grade is its yield. Not only is a 0.8% yield low but it is also being compared to a sector that includes a lot of companies with elevated yields, including banks.
Seeking Alpha
It also helps that the company has a net leverage ratio of 1.4x EBITDA based on 2024 numbers.
Furthermore, the only reason why the company's yield is still low is because capital gains have more than offset dividend growth. That is bad news for investors looking for yield but great news for its existing investors.
Over the past ten years, SPGI shares have returned 572%, beating the S&P 500 and the Financial Select Sector SPDR by a wide margin.
Unfortunately, it didn't help the current valuation.
Using the data in the overview below:
- SPGI currently trades at a blended P/E ratio of 34.8x.
- The 5-year normalized valuation multiple is 28.3x, which I believe is fair for the company, whose 20-year normalized multiple is 21.9x.
- This year, EPS is expected to grow by 12%, followed by expected growth of 14% in both 2024 and 2025.
- Unfortunately, so much growth has been priced in. Even if the company maintains a 31x earnings multiple, the company has an expected annual total return forecast of 8.9% through 2025.
FAST Graphs
Currently, I'm watching both Moody's ( MCO ) and S&P Global ( SPGI ) for an entry, which I hope to add to my portfolio in 2024.
As I believe that the market has gone a bit too far, I am expecting to get a 10% to 15% correction opportunity next year, which I may use to add another top-tier financial stock to my portfolio.
For further details see:
S&P Global: One Of The Most Impressive Financial Stocks On The Market