3 Things to Watch in S&P Global After the IHS Markit Deal

S&P Global (SPGI) – MLY Fool Scoreboard Analysis

Key Concepts:

• S&P Global (SPGI): A leading provider of credit ratings, benchmarks, analytics, and data to the capital and commodity markets.
• Bond Rating Services: Assessment of the creditworthiness of debt securities.
• Market Benchmarks (Indices): Statistical measures used to represent the performance of a market or segment of a market (e.g., S&P 500).
• IHS Markit Acquisition: S&P Global’s significant acquisition in 2022, expanding its data and analytics capabilities.
• Margin Figures: A measure of profitability, representing the percentage of revenue that remains after deducting costs.
• Net Income: A company’s profit after all expenses, including taxes, have been deducted from revenue.
• Operating Income: A company’s profit from its core business operations before interest and taxes.
• Valuation: The process of determining the economic worth of an asset or company.

I. Business Strength – Rating: 8.5/10 (Toby: 9, Dan: 8)

S&P Global’s core business is exceptionally strong, holding a dominant position in the market benchmarks and bond rating industries. The S&P 500 index is considered the “gold standard” and is widely used by index funds, mutual funds, and ETFs. In bond ratings, S&P Global is one of only two or three firms whose ratings are taken seriously by the market. This brand strength has facilitated expansion into new areas like data analytics and services. Competition is limited, with Moody’s and Fitch being the primary competitors in bond ratings. The company is actively integrating artificial intelligence (AI) into its products to enhance data accessibility and investment decision-making for its customers.

II. Management – Rating: 8/10 (Both Toby & Dan)

The current CEO, Martina Chung, has been in the role for approximately one year but possesses 15 years of experience within S&P Global, including roles as Chief Strategy Officer and Head of Risk Services. While her experience is viewed positively, both analysts expressed a desire to observe her performance over a longer period to fully assess her capabilities. The business itself is more complex than it appears, requiring proactive effort to maintain its leading position. S&P Global is exploring opportunities in areas like decentralized finance, blockchain technology, wealth management, private markets, AI, and quantum computing, requiring strategic decision-making from leadership.

III. Financials – Rating: 7.5/10 (Toby: 8, Dan: 7)

Recent financial performance shows consistent growth in both revenue and profits. However, margin figures have weakened since the late 2010s. The 2022 acquisition of IHS Markit significantly expanded the business but also diluted shareholder value through the issuance of additional shares. Recent trends show bottom-line net income and operating income growing faster than revenue, indicating improved efficiency and scalability. Debt levels are a concern, and further large-scale acquisitions (similar in size to IHS Markit) are not advisable until debt is reduced. Cash generation remains strong.

IV. Valuation – Rating: 8.5/10 (Toby: 10-15% return, Safety: 7; Dan: 5-10% return, Safety: 6)

Analysts diverge on future stock performance. Toby Bordalon anticipates a 10-15% return over the next five years, positioning S&P Global as a slight market beater, citing the core business and brand power as sources of resilience. He rates the safety of the stock at a 7. Dan Kaplinger predicts a market-performing return of 5-10%, with a safety score of 6, arguing that current valuations are not particularly attractive given the company’s growth rate. He notes that the stock has already underperformed the S&P 500 over the past five years and sees no clear catalyst for significant outperformance.

Notable Quotes:

• Dan Kaplinger: “The brand is very very strong… that strength, that brand strength has helped propel growth in new areas too, like the data analytics stuff and the services.”
• Toby Bordalon: “It takes effort to maintain your place at the top.”
• Dan Kaplinger: “I think S&P Global is a market performer here… It’s a solid business, but I don’t think the valuations are particularly attractive at these levels.”

Data & Statistics:

• Overall Score: 7.4/10
• IHS Markit Acquisition: Completed in 2022, significantly expanded S&P Global’s size.
• Past 5-Year Performance: S&P Global stock has underperformed the S&P 500 benchmark.
• Recent Financial Trend: Net income and operating income are growing faster than revenue.

Logical Connections:

The analysis progresses logically from assessing the fundamental strength of the business to evaluating management, financial performance, and ultimately, future valuation. The discussion of the IHS Markit acquisition is interwoven throughout the financials and valuation sections, highlighting its impact on shareholder value and debt levels. The analysts’ differing perspectives on valuation are grounded in their interpretations of the company’s growth prospects and financial health.

Conclusion:

S&P Global is a fundamentally strong company with a dominant market position and a resilient brand. While recent financial performance is positive, concerns regarding debt levels and valuation temper expectations for significant outperformance. The success of the company will depend on the new CEO’s ability to navigate a complex business landscape and capitalize on emerging opportunities in areas like AI and data analytics. The overall assessment suggests a solid, but not exceptional, investment opportunity. Dan Kaplinger expressed a preference for Moody’s as a “pure play” in the bond rating business.