S&P Global - Accelerating Revenue Prospects in High-Growth Markets

S&P Global's (SPGI) current FY2022 guidance reflects weakness in the Ratings division but it is accelerating revenue prospects in high-growth markets.

In my most recent S&P Global (SPGI) post, I conclude:

'SPGI's share price may experience an even further pullback from its ~$484 52-week-high. Given that I invest in SPGI to create long-term wealth, however, any further pullback is of little concern to me. I would simply acquire additional shares if the valuation were to improve from the current level.'

On May 2, 2022, Moody's (MCO), SPGI's peer, released Q1 2022 results and lower FY2022 guidance; this led to an attractive pullback in its share price. SPGI's share price also dropped in concert with MCO's share price drop.

Following SPGI's May 3, 2022 release of Q1 2022 results and FY2022 outlook, the share price experienced a further decline. Viewing a company's share price in isolation is not a prudent means by which to invest. However, given a ~$360 share price versus a ~$484 52-week high as recently as mid-December 2021, I now revisit this investment.

S&P Global and IHS Markit Merger

In my January 19, 2021 post I disclose my decision to immediately acquire additional SPGI shares upon learning of the proposed S&P Global and IHS Markit Merger. Expectations were for this merger to close in the 2nd half of 2021. Final regulatory approval, however, was only received on February 25, 2022 and the merger officially closed on February 28.

A comprehensive Investor Presentation about the merger is accessible here.

To secure regulatory approval for the merger, SPGI must divest various businesses. The following lays out the details of these divestitures.

SPGI - Merger Milestones

Source: SPGI - Q1 2022 Earnings Presentation - May 3, 2022

The aggregate revenue from all of the businesses being divested is approximately $0.425B. On the Q1 earnings call, management indicates net after-tax proceeds from these divestitures will total $2.85B and the acquirers paid in aggregate a ~9.5x revenue multiple.

Suspension of Russia and Belarus Operations

SPGI has suspended commercial operations in Russia and Belarus including all customer contracts. In addition, it has suspended ratings of Russian entities and removed stocks and bonds listed or domiciled in Russia from its indices.

The direct financial impact of the conflict in Ukraine is not material to SPGI's business; combined revenue from Russia and Belarus is less than 1% of total revenue.

Financials

Q1 2022 Results

SPGI's Q1 2022 results are found in the Form 8-K and Earnings Presentation.

SPGI continues to have a very strong Balance Sheet with ample liquidity. At the end of Q1 2022, it had cash and cash equivalents of $4.4B and debt of $11.4B.

Adjusted gross debt to adjusted EBITA at the end of Q1 2022 was 2.57x.

SPGI - Cash Position and Leverage Temporarily Elevated

Source: SPGI - Q1 2022 Earnings Presentation - May 3, 2022

The single largest driver in the decline of the cash balance to ~$4.4B at the end of Q1 2022 from ~$6.5B at FYE2021 is the $7B cash disbursement to fund the first tranche of the FY2022 $12B Accelerated Share Repurchase (ASR) program.

SPGI also received $2.6B in net proceeds from divestitures and $2.3B in net proceeds from the issuance of debt.

Immediately following the close of the merger, SPGI undertook measures to optimize its capital structure. It issued $5.5B of new debt of which $3.5B went toward the refinancing of existing debt; the refinancing was completed in April 2022 with a final debt redemption payment of $0.6B. This lowered the adjusted gross debt leverage to 2.47x.

Adjusted pro forma operating profit margin decreased ~340 bps to 45% as both profits and margin were negatively impacted by the decrease in rating transaction revenue and expense growth.

NOTE: Pro forma adjustments present the impact of changes made during the year on the full-year result. The pro forma results then present the performance of the business as if the new situation had already existed from the beginning of the year. Companies often use pro forma figures, for example, when expanding a business. The pro forma adjustments represent the effect of such change on the full-year results of the business as if the acquisition had taken place at the beginning of the year. This provides a basis for comparison for future periods.

SPGI - Q1 2021 and Q1 2022 Financial Results

Source: SPGI - Q1 2022 Earnings Presentation - May 3, 2022

Much like MCO, SPGI's results in its Ratings division fell by low double digits YoY as a result of a 12% decrease in global debt issuance resulting from a sharp decline in debt issuance because of macroeconomic and geopolitical challenges.

SPGI - Decrease In Global Debt Issuance

Source: SPGI - Q1 2022 Earnings Presentation - May 3, 2022

Page 11 in the Q1 2022 Earnings Presentation reflects a 5% YoY decline in Global Investment-Grade Issuance while page 12 reflects a 53% decline in High-Yield Issuance and Leveraged Loan Volume.

Although it is difficult to pinpoint exact causes, management states that lower issuance in Q1 2022 is because of:

  • the pull-forward witnessed in FY2021; and
  • the intentional delay as many issuers await clear signs of stability before re-entering the market.

MCO's management communicated a similar message.

FY2022 Guidance

SPGI's updated FY2022 bond issuance forecast reflects a decrease in Q1. Given the ongoing impact of macroeconomic uncertainty and the ongoing conflict in Ukraine, SPGI now expects global issuance to decline ~ 5% YoY.

SPGI - Global Issuance History and 2022 Forecast

Source: SPGI - Q1 2022 Earnings Presentation - May 3, 2022

Expectations are for corporates to see a 12% decrease in issuance. This will be partially offset by a 2% increase in financial services issuance.

US public finance and structured finance are each forecast to soften by 7% and international public finance is forecast to shrink by ~1.5%.

In addition to lower debt issuance, SPGI now expects slightly lower global GDP growth. Inflation is likely to have a greater impact on SPGI's business and the economy as a whole relative to expectations earlier this year.

The continuing upward pressure on SPGI's compensation expense is forecast to continue throughout FY2022.

In addition, commodity prices remain higher than earlier expectations.

The following reflect adjustments to FY2022 guidance as a result of the changes in some of SPGI's assumptions about the global economy.

SPGI - Updated FY2022 GAAP Guidance

Source: SPGI - Q1 2022 Earnings Presentation - May 3, 2022

SPGI - Updated FY2022 Adjusted Pro Forma Guidance

Source: SPGI - Q1 2022 Earnings Presentation - May 3, 2022

Credit Ratings

Moody's continues to rate SPGI's senior domestic unsecured debt at the A3 level. This rating is stable and is the lowest tier of the upper-medium grade investment-grade category.

The rating defines SPGI as having a VERY STRONG capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree.

Dividends and Share Repurchases

Dividend and Dividend Yield

The predecessor companies of SPGI have a history dating back more than 150 years. In 1937, it initiated a dividend and a dividend has been paid every year. The dividend history on SPGI's website, however, only dates back to 1995.

In conjunction with the February 28, 2022 close of the IHS Markit merger, SPGI announced a 10.4% increase in the regular quarterly cash dividend. The quarterly dividend will increase from $0.77/share to $0.85/share commencing with the dividend payable on June 10, 2022 to shareholders of record on May 27, 2022.

On May 3, 2022, I acquired 50 shares @ $361.16 in one of the 'Core' accounts within the FFJ Portfolio. The new dividend yield based on this purchase price is ~0.94%. In contrast, the dividend yield was:

  • ~0.066% based on the ~$465 share price at the time of my October 2021 review;
  • ~0.078% based on the ~$397 share price at the time of my February 8, 2022 review;
  • ~0.082% based on my ~$374 purchase price on February 25, 2022;

I envision capital gains will continue to be the primary manner in which investors will benefit from an SPGI investment.

Share Repurchases

SPGI's weighted average number of shares outstanding over the FY2011 – FY2021 timeframe (in millions of shares) is 304, 285, 280, 272, 275, 265, 259, 253, 247, 242, and 241.

In my previous post, I indicate the repurchase of treasury shares in FY2018 – FY2020 amounted to $1.66B, $1.24B, and $1.164B. Share repurchases were suspended upon the announcement of the merger. They, however, remain a component of SPGI’s total capital return program and management expects to significantly ramp up share repurchases after the merger is completed

In Q1, SPGI returned $7B to shareholders through an accelerated share repurchase (ASR) agreement. This repurchase represents the first tranche of an expected $12B ASR program. The first $7B tranche is expected to be completed in early August, while the remaining $5B is expected to be executed by the end of the year.

Valuation

At the time of my October 27, 2021 post, shares were trading at ~$465 and FY2021 GAAP guidance was $12.50 - $12.65 resulting in a forward valuation of ~36.8 - ~37.2.

FY2021 adjusted diluted EPS guidance was $13.50 - $13.65 thus giving us a forward adjusted diluted PE range of ~34.1 - ~34.4.

The forward adjusted diluted PE levels using the ~$465 share price and earnings estimates from the brokers which cover SPGI were:

  • FY2021 - 18 brokers - mean of $13.36 and low/high of $13.05 - $13.84. Using the mean estimate and the current share price, the forward adjusted diluted PE was ~34.8.
  • FY2022 - 18 brokers - mean of $14.49 and low/high of $13.72 - $15.30. Using the mean estimate and the current share price, the forward adjusted diluted PE was ~32.
  • FY2023 - 16 brokers - mean of $15.97 and low/high of $14.95 - $17.18. Using the mean estimate and the current share price, the forward adjusted diluted PE was ~29.

When I wrote my February 8, 2022 post, I acquired additional shares at ~$397. With $12.51 in FY2021 diluted EPS, the diluted PE was ~31.7. FY2021 adjusted earnings were $13.70 and the adjusted diluted PE was ~29.

Management had not provided guidance, however, the adjusted diluted PE levels based on broker adjusted diluted EPS estimates were:

  • FY2022 - 15 brokers - mean of $14.69 and low/high of $14.05 - $15.30. Using the mean estimate and the ~$397 share price, the forward adjusted diluted PE was ~27.
  • FY2023 - 13 brokers - mean of $16.20 and low/high of $15.41 - $17.36. Using the mean estimate and the ~$397 share price, the forward adjusted diluted PE was ~24.5.

I subsequently acquired additional shares at ~$374 on February 25, 2022. Using the brokers' earnings estimates from when I acquired shares on February 8, SPGI forward adjusted diluted PE levels were:

  • FY2022 - 15 brokers - mean of $14.69 and low/high of $14.05 - $15.30. Using the mean estimate and the ~$374 share price, the forward adjusted diluted PE was ~25.5.
  • FY2023 - 13 brokers - mean of $16.20 and low/high of $15.41 - $17.36. Using the mean estimate and the ~$374 share price, the forward adjusted diluted PE was ~23.

I envisioned revisions to these earnings estimates upon completion of the merger.

Management's GAAP EPS guidance is expected to be $12.00 - $12.25. Using the $12.125 mid-point and my recent $361.16 purchase price, the forward diluted PE is ~29.8. Using the $13.125 mid-point of $13.00 - $13.25 adjusted diluted EPS guidance, the forward adjusted diluted PE is ~27.5.

Guidance from the brokers which cover SPGI is likely to change over the next several days. For now, however, the valuation based on current guidance is:

  • FY2022 - 19 brokers - mean of $13.13 and low/high of $12.45 - $13.47. Using the mean estimate and my purchase price, the forward adjusted diluted PE is ~27.5.
  • FY2023 - 19 brokers - mean of $15.66 and low/high of $14.30 - $17.00. Using the mean estimate and my purchase price, the forward adjusted diluted PE is ~23.
  • FY2024 - 11 brokers - mean of $17.98 and low/high of $16.27 - $20.00. Using the mean estimate and my purchase price, the forward adjusted diluted PE is ~20.

Final Thoughts

S&P Global is accelerating revenue prospects in high-growth markets which bodes well for future returns. However, it is currently facing headwinds in its Ratings division. This has led to lower guidance and has prompted investors to 'place it in the penalty box'.

As recently as early January 2022when I completed my Investment Holdings Review, I held 300 shares and it was my 18th largest holding. It was my 21st largest holding in my mid-April 2021 review and my 24th largest holding in my mid-August 2020 review.

I think SPGI's long-term outlook remains intact and view recent weakness as an opportunity to acquire additional shares.

I wish you much success on your journey to financial freedom!

Note: Thanks for reading this article. Please send any feedback, corrections, or questions to [email protected].

Disclosure: I am long SPGI.

Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decisions without conducting your research and due diligence. You should also consult your financial advisor about your specific situation.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.