2023-10-05 08:30:00 ET
Summary
- S&P Global is a well-diversified financial company with a strong market position and a wide-moat business model.
- Growth headwinds have impacted the company, but it is expected to see improvement in FY24.
- SPGI nearly fell into a bear market from its July highs as investors assessed higher execution risks from surging bond yields.
- Given its growth premium, investors must be prepared for yield-driven volatility.
- I argue why SPGI buyers have likely returned, helping to defend against the steep decline at a pivotal zone. Also, don't expect to buy a high-quality stock like SPGI cheap.
S&P Global ( SPGI ) is a high-quality company with a well-diversified business model. It encompasses ratings, market intelligence/data analytics, indexes, ESG assessments, commodity and energy transition, and other workflow solutions to help companies and governments make more intelligent decisions.
Given its global market leadership, it's not hard to envisage that S&P Global is a wide-moat company priced at a premium relative to its financial peers. Despite that, SPGI stock remains about 25% below its late 2021 highs as growth slowed.
Given the growth underpinning of its ratings and market intelligence business, S&P Global saw growth headwinds, as higher interest rates and extended sales cycle impacted its momentum. As such, Wall Street estimates suggest that S&P Global is expected to deliver topline growth of about 4.9% this year before significantly improving to 7.3% in FY24.
Analysts' optimism is consistent with management's commentary. The company highlighted at its recent conferences (see here and here ) that it has issued relatively conservative guidance for FY23 amid challenging market conditions. As such, it doesn't anticipate "backtracking" on its outlook, notwithstanding the elevated interest rates that could impede a near-term recovery in bond issuances.
However, with the 10Y Treasury yield surging to 4.89% recently, I believe investors have priced in heightened execution risks on its guidance, as SPGI fell nearly 18% in price-performance terms from its late July highs through this week's lows. Despite that, I believe SPGI's well-diversified business model should help mitigate these headwinds. Coupled with management's relatively conservative outlook, I assessed that dip buyers are expected to support significant dips, such as the one experienced over the past three months.
SPGI Quant Grades (Seeking Alpha)
Seeking Alpha Quant assigned SPGI a "B" growth grade, which justifies its growth premium. Accordingly, SPGI last traded at a forward adjusted P/E of 27x, about a 10% premium against its 10Y average. In other words, not cheap.
I also gleaned that it's markedly above its peers' median of 22.7x (according to S&P Cap IQ data), suggesting investors must be confident about its execution to justify its premium valuation.
However, SPGI's "C" execution grade suggests that the company hasn't been able to outperform estimates spectacularly to earn its growth premium. The critical question is whether such challenges have already been reflected in its recent steep decline (nearly bear market extent) from its July highs?
SPGI price chart (weekly) (TradingView)
My price action analysis suggests that dip buyers have attempted to return more aggressively this week at a pivotal zone.
As seen above, SPGI buyers have attempted to hold its 50-week moving average or MA (blue line). The dynamic support level has underpinned SPGI's recovery since its October 2022 lows.
While I haven't assessed a bullish reversal ascertaining robust buying sentiments, investors looking to buy its recent steep decline should get their dry powder ready.
Takeaway
S&P Global is a wide-moat financial company with a highly profitable business model and a well-entrenched market leadership. Headwinds in capital markets and elevated interest rates have affected its ratings and market intelligence business.
However, the company's headwinds are expected to bottom out this year, suggesting a reacceleration from FY24. In addition, SPGI's price action is constructive, indicating a steep collapse back to October 2022 lows isn't anticipated.
With SPGI still priced at a premium, a further surge in bond yields could heighten execution risks over the next year, leading to a downward valuation de-rating.
Investors looking to add more positions should consider spacing out their allocation to capitalize on dollar-cost averaging opportunities.
Rating: Initiate Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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S&P Global: Top-Notch, Wide-Moat, And Highly Profitable - It Might Never Be Cheap