2023-07-29 05:56:04 ET
Summary
- S&P Global reported mixed second-quarter results, as revenues grew by 3.7% to $3.1B and Adj. EPS came in at $3.12, a $0.01 miss.
- The company completed the divestiture of its Engineering segment, and reaffirmed both its 2023 guidance and long-term targets.
- Management sees early signs of stabilization in the macroeconomic environment for 2023, resulting in an upgraded Ratings outlook.
- The market bull run has led to a 19% increase in linked AUM, which should support growth acceleration in the highly profitable Indices business.
- The company is progressing impressively. However, the stock surged quicker than I expected, and thus I downgrade my Strong Buy rating to a Buy.
S&P Global Inc. ( SPGI ) reported mixed second-quarter results, as revenues grew by 3.7% to $3.1B and Adj. EPS came in at $3.12, a $0.01 miss. Additionally, the company reaffirmed its guidance for 2023 and completed the divestiture of its Engineering business.
There are early signs of improvements in the economic outlook for 2023. The company raised its billed issuance outlook and assets linked to its indexes grew by 19% Y/Y.
The stock surged quicker than I expected, and thus I downgrade my Strong Buy rating to a Buy.
Background
I started covering S&P Global in April, claiming that ' Behind Its Pro Forma 2022 Mess Hides A Strong Buy '. In May, I reaffirmed my Strong Buy rating, as I thought that there was ' Significant Upside Despite Near-Term Headwinds '.
The stock surged through the price target I provided in the May article, and I viewed that as the market getting a little ahead of itself. It will take time before S&P Global returns to historical profitability, as deflated rating activity, longer sale cycles, and post-merger costs, continue to weigh down on the company's results.
Let's see what we can learn from the second-quarter results, and asses if the stock remains attractive.
Q2-23 Highlights
As I wrote in my previous articles:
I have to say, for a financial analytics company, S&P Global's financial reports post the IHS Markit merger sure make life hard for analysts. There are a whole lot of adjustments, non-GAAP metrics, and many many data points. I tried to make sense of all the pro-forma mess in my previous article, and while I'm not a huge fan of adjusted numbers myself, the post-merger GAAP financials are too misleading, so we are forced to rely on the company's adjustments.
Unfortunately, this statement will remain relevant for quite some time. So, let's look at the numbers.
Financial Results
S&P Global reported consolidated revenues of $3.1B, a 3.6% increase from the prior year period. Based on its historical seasonality, the group is on pace to deliver 11.6% reported revenue growth for the entire year (7% on an adjusted pro-forma basis). The company is on pace to meet my $12.4B revenue estimate, which means it's on pace to beat the initial consensus expectations as well.
Created by the author using data from S&P Global financial reports
As we can see, besides Ratings, growth was broad-based across all continuing operations. Market Intelligence increased by 5.8%, Ratings increased by 6.9%, Commodity Insights grew by 8.2%, and Mobility grew by 9.5%. Indices grew by 3.0%, as average linked AUM increased by 5% to $2.77T.
Notably, the end-of-period linked AUM was much higher at $2.93T, up 19% Y/Y, reflective of the bull run during the last few months. This should lead to growth acceleration in the Indices segment in the very near term.
Created by the author using data from S&P Global financial reports
Looking at Adj. EBIT per segment, results were mixed. Market Intelligence Adj. EBIT increased by 3.9%, reflecting a 60 bps margin decline. Ratings Adj. EBIT increased by 3.8%, experiencing a 172 bps margin contraction. Commodity Insights Adj. EBIT grew by 12.2%, reflecting a 164 bps margin expansion. Mobility Adj. EBIT grew by 5.7%, as revenue growth was offset by a 150 bps margin decline. Indices Adj. EBIT decreased by 2.1%, reflecting a 350 bps margin deterioration. On a consolidated basis, Adj. EBIT grew by 2%.
Billed Issuance
In Q1, we saw continued pressures on debt issuance, primarily due to an unstable rate environment, growing inflation, the regional banking crisis, and a deflated sentiment.
S&P Global 2Q 2023 Earnings Presentation
In Q2, we saw a better picture. Billed issuance is up 8% Y/Y, although the comparison is much easier. Quarter-over-quarter, issuance is up nearly 1%.
Despite ongoing pressures, S&P Global's management upgraded their issuance outlook for the year from a range of 3%-7% to 4%-8%. They also improved their underlying forecast for global issuance (which includes issuance that isn't billed by the company) to negative 1.5% at the mid-point. In simple words, they expect to outperform the issuance market by 7.5 percentage points.
Integration
The IHS Markit integration is progressing toward management's goals, and in some parts of the business, it's ahead of schedule. As of Q2-23, 85% of the cost synergies target for 2023 was achieved, and the company is on track to reach its 2026 revenue synergies goal.
S&P Global 2Q 2023 Earnings Presentation
Economic Factors Affecting The Company
In my previous articles, I explained why I don't view the company's sensitivity to macroeconomic factors as a sign of lower quality. To put it simply, I'm fine with a company that's reliant on ever-growing factors, that experience volatility from time to time.
For instance, the Ratings business is affected by higher interest rates, which depress debt issuance. However, looking at debt issuance over the last 100 years, it's clear that over the long term, it's only going one way, and that's up.
Another example is equity markets. As investors, we all know that the company's proprietary index, the S&P 500, could have hiccups from time to time. However, even the best investors in the world are having difficulties beating it over a long time period, and according to many studies , there have only been five 10-year periods in history in which the S&P 500 wasn't positive. So, yes, the Indices business could fluctuate on downtrends, but it will come out stronger.
S&P Global 2Q 2023 Earnings Presentation
Focusing on what changed from last quarter, the company changed its outlook for a recession. Instead of a mild recession, it now expects an economic slowdown. Besides that, it reaffirmed its previous outlook.
Updated Valuation
I used a discounted cash flow ("DCF") methodology to evaluate SPGI's fair value. I assume the company will grow revenues at a CAGR of 6.6% between 2023-2030, which is according to the company's long-term growth targets.
I expect SPGI's EBITDA margins will increase incrementally up to 53.0%, according to the management's long-term guidance of adjusted EBIT margins between 48.0%-50.0%.
Created and calculated by the author based on S&P Global financial reports and the author's projections
Taking a WACC of 7.7%, I estimate SPGI's fair value at $136.5B or $427 per share, which represents an 8.8% upside compared to its market value at the time of writing.
In previous articles, I wrote a disclaimer as follows:
One important thing to emphasize is that I don't expect SPGI stock will reach my fair valuation in a matter of a week or months. It's going to take at least a few quarters as investors await clarity regarding the company's margins and the timing of recovery in the company's economy-sensitive businesses. The stock may very well drop significantly if we experience a market drawdown or if the Fed decides to raise rates more than expected, which will result in continued depression in the debt market.
Well, I guess it came faster than expected and went away after earnings. That being said, I think it provided another buying opportunity.
Conclusion
Times of uncertainty are usually the best times to buy long-term compounders like S&P Global. Those times are seemingly over, as the market is now extremely bullish once again.
I thought that the price went ahead of itself before second-quarter earnings, and the recent selloff has sent it back to a reasonable price. While I can't predict when the debt market stabilizes and recession fears evaporate, long-term S&P Global investors received another buying opportunity.
Even after the selloff, the stock is still up 11% since my previous article. As there's less upside today, I downgrade my Strong Buy rating to a Buy.
For further details see:
S&P Global: Take Advantage Of The Post-Earnings Selloff (Rating Downgrade)