S&P Global: Strong Growth Opportunities (NYSE:SPGI)

Investment Thesis

S&P Global (NYSE:SPGI) has been one of the best compounders in the past decade, with its share price up over 750% during the period, comfortably beating the return of the S&P 500 index. However, amid high inflation, rising rates, and recessionary fears, the company is now trading 23% below its all-time high.

I believe the pullback is temporary and provides a good buying opportunity for long-term investors as the company’s fundamentals remain strong and the merger with IHS Markit should open up more growth opportunities. The company has been very shareholder friendly throughout the past with consistent increases in dividends and buybacks. The latest guidance was extremely upbeat and indicate a re-acceleration in growth. The current valuation is also discounted when compared to peers. Therefore I rate S&P Global as a buy.

Multiple Growth Opportunities

In late 2020, S&P Global merged with IHS Markit in a $44 billion all-stock deal, transforming the company into a financial powerhouse. IHS Markit specializes in analytics and information solutions for the financial markets. The merger allows S&P Global to diversify its revenue stream and further expand into the analytical space, which presents a huge growth opportunity. After the merger, S&P Global has regrouped and is now divided into 5 segments: market intelligence, ratings, mobility, commodity insights, and indices.

The market intelligence segment currently represents the biggest growth opportunity for the company. Its TAM (total addressable market) is estimated to be around $70 billion and the existing penetration rate is only around 5.9%, which leaves significant room for further expansion. The recent uncertainty in the macro economy has increased the demand for more sophisticated analytics solutions in areas such as supply chain, credit, and risk management, as customers seek better visibility.

Besides market intelligence, commodity insights and mobility are the other two strategic growth areas. The commodity insights segment currently has a TAM of $10.6 billion. The commodity market has gained a lot of attention in the past few years. Commodity prices continue to be very volatile due to geopolitical pressure and supply chain disruption. The ongoing uncertainty will serve as a tailwind for commodity insights as oil & gas companies now need more data and resources for decision-making.

Last but not least, Mobility currently presents a TAM of $12.2 billion. The mobility market has been evolving rapidly and is benefiting from strong tailwinds. The EV adoption rate continues to increase and S&P Global expects by 2030, 50% of all vehicles will be EV. We are also seeing new trends emerge in the sector such as connected cars, autonomous vehicles, online car buying, and more. The mobility segment is able to provide data and advisory solution that helps manufacturers and dealers to manage the transition.

I believe these segments should give S&P Global ample room to expand and help fuel growth in the near term. The company is also able to provide the best in class offerings as it has an unmatched amount of data and expert analysts. During the investor day last year, the management team said that they are targeting low to mid-teens EPS (earnings per share) growth and it should definitely be achievable considering the multiple opportunities ahead.

Buybacks and Dividends

S&P Global has also been actively returning cash to shareholders through both dividends and buybacks. The company currently has a quarterly dividend payout of $0.9 which translates to a dividend yield of around 0.99%. The yield is certainly low but the payout has been growing quickly. The dividend growth rate for the past 5 years was around 15.2%, as shown in the first chart below. Yet, the payout ratio is still currently only 29.7%. I believe the payout ratio may increase further as the company finally completed the massive merger with IHS Markit.

On the buyback end, the company has been buying back shares consistently throughout the past decade with the share count down around 15% from 2013 to 2020, as shown in the second chart below. The sideway and huge pop from 2020 to 2022 are due to the merger but the company has already resumed repurchases last year with $12 billion being deployed. It recently announced a new $3.3 billion buyback program for 2023 and the ongoing buyback will help offset the dilution from the merger and boost the EPS figure further.

Q4 Earnings

S&P Global recently announced its Q4 earnings and it recorded a double beat with solid guidance. The company reported revenue of $2.94 billion, up 41% compared to $2.1 billion. However, this included the revenue from its acquisition. On a pro-forma basis, revenue actually declined by 6%. The decline is mostly driven by the rating segment which dropped 29% to $705 million, as issuance volume sank on pessimistic market sentiment. Indices was the best-performing segment, with revenue up 14% to $344 million. The mobility segment was also strong with revenue up 9%. On a pro forma basis, operating profit was down 10% from $1.34 billion to $1.21 billion. Diluted EPS was $2.54 compared to $2.67, representing a decrease of 5%. The softness in the bottom line was also attributed to the rating segment.

However, guidance seems to indicate a strong rebound in the coming year. The company expects FY23 revenue growth to be 4%-6% and EPS growth to be roughly 11%. This is a huge step up from the prior years and the worst may be behind us. Overall, this quarter’s performance was decent considering the macro backdrop and the guidance is definitely something to be excited about.

Valuation

After the pullback last year, S&P Global is now trading at a PE ratio of 34.7x. The multiple seems high at first glance but it is actually discounted when compared to peers. From the chart below, you can see that Moody’s (MCO), MSCI (MSCI), and Morningstar (MORN) all have a higher multiple with the average PE ratio being 58.4x. The sector has been trading at a high PE ratio for a long time and it rightfully deserves it due to its quality. The sector is an oligopoly and all companies have strong pricing power and growth trajectory. They also operate with a subscription model, making their revenue stream much more sticky and predictable. S&P Global expects the long-term revenue growth rate to be around 7%-9% with an operating margin of 48%-50%, while EPS is expected to grow at low to mid-teens CAGR. The management team has a great track record of executing and these types of numbers should warrant the company with a valuation similar to the sector’s average which offers decent potential upside.

Conclusion

In conclusion, I believe the current price offers a good entry point for long-term investors. S&P Global’s fundamentals are very strong and the merger with IHS Markit made it even better, as it opens up more growth opportunities in different segments like intelligence and mobility. There are certainly risks in regard to the weakening macro economy but the company should be able to show solid resistance as most of its revenue is recurring and subscription-based. The latest guidance indicates earnings trough may be over and it is ready to move back to posting long-term double digits EPS growth. Its current valuation is meaningfully below its peers and I think we could see a multiple revision back to the sector’s average. Therefore I rate S&P Global as a buy.