Summary
- SPGI's diversified business lines and recurring revenue streams have helped to offset the decline in Ratings revenue.
- I expect management's initiative to optimize technology spending and broaden its product offering to increase SPGI's ability to retain and charge premium rates for its services.
- Overall, the strong moat and ability to deliver shareholder returns through capital allocation still make SPGI a buy rating.
Summary
S&P Global ( SPGI ) diversified business lines, recurring revenue streams, and merger synergies all contributed to its good 4Q results, which included revenue and earnings that exceeded consensus estimates. With regard to guidance, in my opinion, SPGI's non-Ratings businesses will be able to achieve the revenue growth target set for 2023. In addition, I also believe that management's outlook for Indices growth this year has room for improvement. Specifically, I anticipate a recovery in debt issuance volumes and Ratings revenue as the macro environment improves toward 2H23. This will be accompanied by stable interest rates, an expanding pipeline of debt refinancing opportunities, and a growing backlog of new issuers. The sale of Engineering Solutions, which is expected to close in the second quarter of 2023, will also make for a more streamlined portfolio, and management is now guiding to 85% of $600 million in run-rate cost synergies being achieved in 2023, up from 80% previously. Overall, my thesis on SPGI has not changed. It is still one of the best company with a strong moat. I reiterate my buy rating.
Positives
There's no denying the value diversification brings to SPGI. Given the low levels of global debt issuance volumes in 4Q, the mid-single-digits growth of other segments aside from Ratings have significantly offset the major drop in Ratings revenue. Moreover, management anticipates that the growth of non-ratings revenue will quicken from the mid-single digits seen in 2022 to the mid- to high-single digits seen in 2023 - which would give further cushion for any "shocks" in the rating segment again. Given that SPGI is heavily levered to how the global rated debt market performs, I expect to see accelerating sequential growth for FY23, with the volume of issuance growing in 2023 compared to the major decline in 2022. This is in line with expectations for revenue growth in Ratings in FY23, driven by a better macro backdrop, rates environment, a growing debt refinancing pipeline, and increased number of new issuers.
Management has launched an initiative to optimize technology spending to speed up innovation and make better use of AI and ML, and it is still putting resources into its other strategic priorities like the private market and the sustainability and energy transition. From what I can tell, these new modules/products will have two effects: One, it broadens SPGI's product offering, making the company less reliant on a single revenue stream, and two, it further integrates SPGI into its clients' underlying operating systems, thereby increasing the company's ability to retain and charge premium rates for its services.
What else is encouraging is that management has succeeded in realizing cost synergies from the IHS Markit merger, achieving $276 million in 2022, well above their goal of $210-240 million. SPGI has also boosted their 2023 goal for cost synergies at a run rate of $600 million. The sale of Engineering Solutions, which is planned for the 2Q23, is anticipated to improve capital allocation and management's focus while also streamlining the company's product offering and boosting revenue growth and margin characteristics.
Negatives
Now for the bad news: I expect the sharp drops in global debt issuance volumes to have a negative impact on the growth of Ratings and to continue to act as a headwind for the near-term in FY23, before returning to positive growth territory in 2H23. 4Q Market Intelligence growth was also significantly lower than I had anticipated. Nonetheless, I take heart from the fact that fundamental trends, such as active user growth and the introduction of new features, continue to be strong.
Capital allocation
Given the importance of capital returns in SPGI's shareholder returns algorithm, it's encouraging to see the company planning to return up to $3.3 billion to shareholders through share repurchases in 2023. This would be equivalent to returning 85% of SPGI full-year FCF guidance of $4.3-4.4 billion to shareholders (after dividends and net proceeds from the sale of Engineering Solutions).
Guidance
SPGI anticipates a 4-6% or 6-8% increase in revenue in 2023 (when excluding Engineering Solutions). For 2023, management is anticipating an operating margin of 45.5% to 46.5% and EPS of $12.35 to $12.55. As far as I can tell, the estimate is in line with consensus estimates, so I consider it a stable guide.
Conclusion
SPGI's diversified business lines, recurring revenue streams, and successful merger synergies have contributed to strong Q4 results that exceeded consensus estimates. While there were challenges with the sharp drops in global debt issuance volumes, I expect to see accelerating sequential growth for FY23 as the macro environment improves and debt refinancing opportunities increase. SPGI's initiative to optimize technology spending and broaden its product offering is also a positive development, as is the company's success in realizing cost synergies and boosting its goal for cost synergies in 2023. While there are challenges, overall my thesis on SPGI has not changed, and I maintain my buy rating due to its strong moat and ability to deliver shareholder returns through capital allocation.
For further details see:
S&P Global: Still A Strong Business With A Strong Moat