S&P Global – Attractive Long-Term Outlook Despite Short-Term Ratings Division Headwinds

I last reviewed S&P Global (SPGI) in my October 31, 2022 post at which time I considered shares to be attractively valued. It continues to have an attractive long-term outlook despite short-term Ratings Division headwinds. However, shares are not attractively valued.

I like to accumulate shares in great companies when they experience short-term headwinds; SPGI is experiencing such headwinds in its Ratings division. This division's results have suffered because of a dramatic decrease in global debt issuance because of the economic environment. However, SPGI's recent global refinancing study estimates that ~$11.1T of global debt will mature over the next 5 years so I expect an improvement in SPGI's results over the coming years.

SPGI's Ratings research group anticipates that issuance will grow in 2023 with issuance gains of 8.5% for nonfinancials, 3% for financial services, 5% for U.S. public finance, and a 7% decrease in structured finance. This is an issuance forecast and not a revenue forecast and it does not include leveraged loans.

Looking at 2025 - 2027, expectations are for a ~12% increase in maturities from last year's study. This increase jumps to 23% when we account for projected maturities in 2027 - 2029. This data suggests SPGI has a very healthy pipeline of debt maturities over the next several years.

From a total rated debt outstanding perspective, SPGI continues to see a compound growth rate of ~5% and a continued YoY increase in total debt outstanding on a constant currency basis. Historically, outstanding debt usually gets refinanced, and there is nothing to suggest this decades-long trend will change.

Investor Day

On December 2, 2022, SPGI held its Investor Day at which time it presented its 2025/2026 targets for SPGI as a whole and for each division.

When I completed my October 31, 2022 post, SPGI had 6 divisions. On January 17, 2023, however, SPGI announced that it reached an agreement to sell its Engineering Solutions division to KKR. The expected closing is Q2 2023 which explains why targets are not provided for this division.

Financials

Q4 and FY2022 Results

The quarterly earnings material is accessible here.

The following provides a very high-level overview of SPGI's FY2022 results and divisional results.

SPGI's Ratings division has typically generated the most Revenue and Operating Profit with the Market Intelligence division coming in 2nd. The Indices division, however, has been slightly more profitable than the Market Intelligence division.

The following operating results reflect the difficult operating environment the Ratings division has had to endure in FY2022.

SPGI's adjusted gross leverage to adjusted EBITDA target is 2.0x – 2.5x. This ratio has deteriorated slightly over the past few quarters but the company is fully committed to maintaining an investment-grade rating and restoring the ratio to within the target range.

Free Cash Flow (FCF)

SPGI's FY2013 - FY2021 FCF (in billions of $) is $0.665, $1.117, $0.217, $1.445, $1.893, $1.951, $2.661, $3.491, and $3.563. The $3.336B FY2021 FCF reported by SPGI, however, is more conservative in that it also deducts the distributions made to noncontrolling interest holders.

Non-GAAP Pro Forma Adjusted Operating Profit Margin

The following reflects SPGI's trailing 12 Month Non-GAAP Pro Forma Adjusted Operating Profit Margin. We quickly see the extent to which the Ratings segment has suffered over the past few quarters.

The trailing 12 Month Non-GAAP Pro Forma Adjusted Operating Profit Margins reflected in the Q4 2022 Earnings Presentation are:

• Market Intelligence: 31.8%
• Ratings: 55.9%
• Commodity Insights: 44.3%
• Mobility: 39%
• Indices: 68.4%

FY2023 Guidance

SPGI is not providing 2023 GAAP guidance because management cannot reliably predict all of the necessary components of GAAP measures given the inherent uncertainty around the timing of the divestiture of Engineering Solutions.

FY2023 adjusted guidance, however, is as follows:

 

Credit Ratings

The ratings assigned to SPGI's senior domestic unsecured debt are unchanged from the time of my last review. They are stable and are the lowest tier of the upper-medium grade investment-grade category.

• Moody's: A3
• Fitch: A-

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

Both ratings satisfy my risk profile.

Dividends and Share Repurchases

Dividend and Dividend Yield

SPGI's dividend history is accessible here. On January 25, 2023, SPGI declared an $0.90 quarterly dividend payable on March 10 to shareholders of record on February 24. This dividend is $0.05/share greater than the prior dividend (a ~5.9% increase).

When I last reviewed SPGI, shares were trading at ~$321.25 and the dividend yield was ~1.06%.

Shares now trade at ~$363.30 and the $3.60 annual dividend yields ~1%.

I expect that capital gains will continue to constitute the majority of SPGI's total future investment return.

Share Repurchases

SPGI's weighted average number of shares outstanding over the FY2011 – FY2022 timeframe (in millions of shares) is 304, 285, 280, 272, 275, 265, 259, 253, 247, 242, 241, and 322 at FYE2022. The increase in FY2022 is attributed primarily to the shares issued to finance the merger with IHS Markit that was completed on February 28, 2022.

Details of SPGI's stock repurchase programs commence on page 23 of 90 in the Q3 2022 Form 10-Q.

SPGI also enters into accelerated share repurchase (“ASR”) agreements with financial institutions to initiate share repurchases of its common stock. SPGI has aggressively reduced the number of issued and outstanding shares in FY2022 as reflected below.

Valuation

Please refer to my October 31, 2022 post in which I review SPGI's valuation at the time of several previous SPGI reviews.

At the time of my October 31, 2022 post, shares were trading at ~$321.25 and management's revised FY2022 GAAP guidance was $9.75 – $9.90. Using a $9.83 midpoint and the current ~$321.25 share price, the forward diluted PE was ~32.7.

Management's revised adjusted diluted EPS guidance for FY2022 was $11.00 – $11.15. Using the $11.08 midpoint and the current share price, SPGI's valuation was ~29.2.

The valuation based on broker guidance was:

• FY2022 - 21 brokers - mean of $11.21 and low/high of $11.05 - $11.57. Using the mean estimate and the current ~$324 share price, the forward adjusted diluted PE is ~29.
• FY2023 - 21 brokers - mean of $13.22 and low/high of $11.66 - $16.13. Using the mean estimate and the current ~$324 share price, the forward adjusted diluted PE is ~24.3.
• FY2024 - 18 brokers - mean of $15.38 and low/high of $13.30 - $18.26. Using the mean estimate and the current ~$324 share price, the forward adjusted diluted PE is ~20.9.

SPGI has just reported FY2022 diluted EPS and adjusted diluted EPS of $10.20 and $11.19. Using the current ~$363.30 share price, the diluted and adjusted diluted PE are ~35.6 and ~32.5.

As noted earlier, management is not providing FY2023 GAAP guidance. Its adjusted diluted EPS guidance, however, is $12.35 - $12.55. Using the $12.45 midpoint and the current ~$363.30 share price, the forward adjusted diluted PE is ~29.2.

The valuation based on broker guidance is:

• FY2023 -  20 brokers - mean of $12.46 and low/high of $11.15 - $13.42. Using the mean estimate and the current share price, the forward adjusted diluted PE is ~29.2.
• FY2024 -  20 brokers - mean of $14.38 and low/high of $12.60 - $15.47. Using the mean estimate and the current share price, the forward adjusted diluted PE is ~25.3.
• FY2025 -  9 brokers - mean of $16.57 and low/high of $16.18 - $17.84. Using the mean estimate and the current share price, the forward adjusted diluted PE is ~22.

I expect broker guidance to be adjusted lower over the coming days.

Final Thoughts

SPGI was my 8th largest holding when I completed my January 2023 Investment Holdings Review; my SPGI exposure is reflected in the monthly FFJ Portfolio reports.

The short-term headwinds SPGI's Ratings division is experiencing are what Moody's (MCO) is also facing. I reviewed MCO in this January 31 post at which time I concluded MCO's valuation was not justified; MCO's share price was ~$323 but dropped to ~$307 at the February 9 market close. Despite this ~$16 decline, MCO's valuation has only slightly improved because broker guidance has been lowered subsequent to January 31.

I expect the results at SPGI's and MCO's Ratings lines of business to eventually recover, and therefore, have not changed my long-term outlook about both being great long-term investments. However, I am reluctant to add to my exposure in both companies at this stage. A broad market pullback within the first half of 2023 is not an unreasonable expectation. If one should occur, I intend to acquire more shares at more favourable valuations.

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 and MCO.

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.