S&P Global - Attractively Valued With Strong Recurring Revenue and Expense Discipline

Based on the Q3 and FY2022 results released on October 27, 2022, S&P Global (SPGI) is attractively valued with strong recurring revenue and expense discipline. In contrast, following the release of Q2 and YTD 2022 results, I concluded in my August 2, 2022 post, that it would be wise to wait for a better valuation.

Financials

Q3 and YTD2022 Results

Please refer to the Earnings Release, Earnings Presentation, and the Q3 2022 Form 10-Q.

SPGI is coming up on 2 years since the IHS Markit merger announcement and ~8 months since the close. Following the completion of the merger, the number of reportable segments has increased from 4 to 6:

  • Market Intelligence
  • Ratings
  • Commodity Insights
  • Mobility
  • Indices and;
  • Engineering Solutions.

Investors are, therefore, cautioned not to attempt to compare current quarterly segment results against quarterly segment results from prior fiscal years.

The 8% YoY decrease in Revenue reflects growth in 4 of the 6 segments. Softness in global issuances, however, has resulted in a significant deterioration in the results of SPGI's Ratings segment which has offset the growth in the 4 segments.

Recurring revenue in Q3 increased 2% YoY and adjusted expenses declined 5% YoY as cost synergies and disciplined expense management offset some of the inflationary impacts in labour and technology.

Excluding the Ratings business, SPGI saw an average of ~250 bps of adjusted operating margin expansion YoY.

SPGI remains committed to disciplined expense management. In Q3, SPGI continued to take measures to protect margins while still preserving investments to drive future growth. Actions taken include acceleration in synergies, a reduction in incentive accruals, adjustments to the timing of certain investments and pausing select hiring and limiting consulting spending. Through YTD cost synergies and other management actions, management expects to generate more than $0.4B in FY2022 expense savings.

Regarding synergy progress, SPGI achieved $0.165B in cumulative cost synergies in Q3 and the current annualized run rate is $0.311B. The cumulative integration and cost to achieve synergies through the end of Q3 is $0.641B. Given the outperformance on the timing of synergies, SPGI now expects to achieve slightly more than the 35% - 40% of total cost synergies in 2022 that were previously targeted.

The following images provide a recap of SPGI's Q3 2022 results. The Earnings Presentation, however, provides details for each of the 6 segments.

SPGI - Division Financial Performance - Q3 2022

Source: SPGI - Q3 2022 Earnings Presentation - October 27, 2022

Comparative Q1 and Q2 2022 results are accessible in my August 2, 2022 post.

SPGI's adjusted gross leverage is near its current target range although the ratios deteriorated very slightly from those reported in Q2. This very slight deterioration is no cause for concern.

SPGI - Adj Gross Leverage Within Current Target Range Q3 2022

Source: SPGI - Q3 2022 Earnings Presentation - October 27, 2022

The following reflect SPGI's adjusted gross leverage in Q2 and Q1 2022 and are provided for comparison purposes.

SPGI - Adj Gross Leverage Within Current Target Range Q2 2022

Source: SPGI - Q2 2022 Earnings Presentation - August 2, 2022

 

SPGI - Cash Position and Leverage Temporarily Elevated

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

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.

SPGI - Trailing 12 Month Non GAAP Pro Forma Adj Op Profit Margin

Source: SPGI - Q3 2022 Earnings Presentation - October 27, 2022

The decline in Engineering Solutions revenue is driven primarily by the negative impact of the timing of the Boiler Pressure Vessel Code (BVPC) which was last released in August 2021; this segment releases a core product once every two years. The BPVC contributed ~$1 million in Q3 2022 revenue compared to ~$8 million in Q3 2021.

FY2022 Guidance

SPGI will only provide its initial FY2023 outlook when it reports Q4 and FY2022 results in early 2023. However, some of the macroeconomic indicators being used to help formulate FY2023 guidance reflect a deterioration in debt issuance, GDP growth, inflation, and the commodities markets metrics.

On the Q3 2022 earnings call, management indicated its Ratings research team is expecting a ~19% decline in global market issuance, including both rated and unrated issuance for FY2022. This compares to the previous forecast of a ~16% decline.

Financial results and guidance, however, are more closely tied to billed issuance, which can differ materially from market issuance. YTD market issuances declined ~14% while billed issuances declined ~42%. Based on the trends observed in September and October, SPGI now expects billed issuance to be down ~45% - 50% for FY2022. Looking at the broader macroeconomic environment for the remainder of 2022, SPGI continues to see further deterioration from what was expected in August.

SPGI - Declines in Debt Issuance Expected to Continue - Q3 2022

Source: SPGI - Q3 2022 Earnings Presentation - October 27, 2022

The following guidance revisions reflect continued headwinds in Ratings as well as better-than-expected performance in Indices. Guidance ranges for the other 4 divisions are unchanged from Q2 2022.

SPGI - Updated FY2022 GAAP and Adj Pro Forma Guidance Q3 2022

Source: SPGI - Q3 2022 Earnings Presentation - October 27, 2022

SPGI's guidance provided with the release of Q1 and Q2 2022 results are accessible through my August 2, 2022 post.

Credit Ratings

The ratings assigned to SPGI's senior domestic unsecured debt 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.

Dividends and Share Repurchases

Dividend and Dividend Yield

SPGI's dividend history is accessible here. On September 28, 2022, SPGI declared an $0.85 quarterly dividend payable on December 12, 2022, to shareholders of record on November 28, 2022. This marks the 3rd quarterly dividend at this level.

I last added to my SPGI exposure on June 1, 2022 with the purchase of 50 shares @ $336.93 in one of the 'Core' accounts within the FFJ Portfolio. The dividend yield based on that purchase price was ~1%.

Shares now trade at ~$321.25 and the dividend yield is ~1.06%.

I continue to 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 – FY2021 timeframe (in millions of shares) is 304, 285, 280, 272, 275, 265, 259, 253, 247, 242, and 241.

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 - Accelerated Share Repurchases YTD2022

Source: SPGI - Q3 2022 Form 10-Q

The following image shows the extent to which SPGI's ASR programs have reduced the weighted average shares outstanding YTD.

SPGI - ASR - Progression and Impact to Diluted Weighted Avg Shares Outstanding

Source: SPGI - Q3 2022 Earnings Presentation - October 27, 2022

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's 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.

At the time of that review, I envisioned revisions to these earnings estimates upon completion of the merger.

At the time of my May 5, 2022 post, management's FY2022 GAAP EPS guidance was $12.00 - $12.25. Using the $12.125 mid-point and my recent $361.16 purchase price, the forward diluted PE was ~29.8. Using the $13.125 mid-point of the $13.00 - $13.25 adjusted diluted EPS guidance, the forward adjusted diluted PE was ~27.5.

I expected guidance from the brokers which cover SPGI to change over the next several days. However, based on the current broker guidance, the valuation was:

  • 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.

I acquired additional shares on June 1 @ $336.93/share but neglected to record broker guidance at the time of my purchase. If I use the guidance from the time of my May 5, 2022 purchase, SPGI's valuation was:

  • 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 ~25.7.
  • 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 ~21.5.
  • 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 ~18.7.

When I wrote my August 2, 2022 post, management's revised adjusted diluted EPS guidance for FY2022 was $11.35 – $11.55. Using the $11.45 midpoint and the current ~$371 share price, SPGI's valuation was ~32.4.

The valuation based on current broker guidance was:

  • FY2022 - 20 brokers - mean of $11.77 and low/high of $11.35 - $13.20. Using the mean estimate and my purchase price, the forward adjusted diluted PE is ~31.5.
  • FY2023 - 20 brokers - mean of $14.22 and low/high of $12.74 - $15.15. Using the mean estimate and my purchase price, the forward adjusted diluted PE is ~26.1.
  • FY2024 - 11 brokers - mean of $16.69 and low/high of $14.52 - $18.04. Using the mean estimate and my purchase price, the forward adjusted diluted PE is ~22.2.

In my previous post, management's FY2022 GAAP guidance was $10.20 – $10.40. Using a $10.30 midpoint and the current ~$371 share price, the forward diluted PE was ~36.

Shares now trade at ~$321.25 and management's revised adjusted diluted EPS guidance for FY2022 is $11.00 – $11.15. Using the $11.08 midpoint and the current share price, SPGI's valuation is ~29.2.

The valuation based on current broker guidance is:

  • 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.

Management's revised FY2022 GAAP guidance is $9.75 – $9.90. Using a $9.83 midpoint and the current ~$321.25 share price, the forward diluted PE is ~32.7.

Final Thoughts

When I wrote my August 2, 2022 post, I had set aside liquidity to take advantage of attractive buying opportunities I anticipated would come about before year-end.

As noted in recent posts, plans changed when we entered into an agreement of purchase and sale on September 13; the purchase of a second home closes on November 2.

At the time of my Mid-2022 Investment Holdings Review, SPGI was my 10th largest holding. I like its long-term outlook and fully intended to add to my exposure if it fell out of favour with investors. (I also intended to do the same with Moody's (MCO). So much for that plan!

SPGI is currently experiencing short-term headwinds with the cyclical rating segment being in the 'down' part of the cycle. This is the time investors should be investing in SPGI! Accumulate shares and if SPGI shares experience further weakness....buy more.

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.