Contents
I last reviewed S&P Global (SPGI) in my July 29 post following the release of Q2 and YTD2023 results on July 27. With the release of Q3 and YTD2023 results and revised FY2023 guidance on November 2, I revisit this existing holding.
Business Overview
Please read Part 1 - Item 1 - Business in the FY2022 Form 10-K if you are not entirely familiar with the extent of SPGI's operations.
Financials
Q3 and YTD2023 Results
The quarterly earnings material is accessible here and the Q3 2023 Form 10-Q is accessible here.
The following is a very high-level overview of SPGI's Q3 and YTD2023 results and divisional results.
SPGI continues to experience a lengthening of the sales cycle which management believes is driven by customer sensitivity around spending. The firm's cross-selling efforts are also creating larger contracts, which typically take longer to close. While sales cycles remain a bit longer than normal, SPGI is starting to see some stabilization.
Historically, the Ratings division generated the most Revenue and Operating Profit with the Market Intelligence division coming in 2nd.
Bond issuance volume is a key revenue driver for the Ratings division. Despite an improvement in this division relative to prior recent quarters, management still sees headwinds in issuer credit rating revenue as fewer new issuers come to the market.
The following operating segment results for FY2021 and FY2022 are provided for comparison.
Leverage
SPGI's adjusted gross leverage to adjusted EBITDA target is 2.0x – 2.5x. The Q3 2023 adjusted gross leverage ratio of 2.7x has improved marginally from that in Q2 2023. The company remains fully committed to maintaining an investment-grade rating and restoring the ratio to within the target range.
Free Cash Flow (FCF)
SPGI's FY2013 - FY2022 FCF (in billions of $) is $0.665, $1.117, $0.217, $1.445, $1.893, $1.951, $2.661, $3.491, $3.563, and $2.514. The FCF reported by SPGI, however, is more conservative than that reported elsewhere in that SPGI deducts the distributions made to noncontrolling interest holders.
Source: SPGI - Q3 2023 Earnings Supplemental Disclosure - November 2, 2023
Source: SPGI - Q2 2023 Earnings Supplemental Disclosure - July 27 2023
Non-GAAP Pro Forma Adjusted Operating Profit Margin
The following reflects SPGI's trailing 12-month Non-GAAP Pro Forma Adjusted Operating Profit Margin. Prior to FY2022, the Ratings division used to be the leading division. Ratings, however, dropped significantly in FY2022. While business in this division is slowly improving, operating results have yet to fully recover to FY2020 and FY2021 levels.
Source: SPGI - Q3 2023 Earnings Supplemental Disclosure - November 2, 2023
FY2023 Guidance
The Ratings division which experienced weakness over several consecutive quarters appears to have 'turned the corner'. SPGI completed its global refinancing study in July 2023 and determined there is over $8 trillion of debt rated by SPGI that matures through 2026 and nearly $13 trillion that matures through 2028. This, in addition to assumed improvements in the macro environment over the next few years, gives management confidence in the firm's ability to drive profitable multiyear growth in its Ratings division.
The following reflect SPGI FY2023's most current guidance.
Source: SPGI - Q3 2023 Earnings Supplemental Disclosure - November 2, 2023
Source: SPGI - Q3 2023 Earnings Supplemental Disclosure - November 2, 2023
Source: SPGI - Q3 2023 Earnings Supplemental Disclosure - November 2, 2023
Credit Ratings
SPGI has the ability to borrow a total of $2B through its commercial paper program, which is supported by a $2B 5-year credit agreement that will terminate on April 26, 2026. As of September 30, 2023, there was no outstanding commercial paper.
The following is a list of SPGI's long-term debt arrangements as of the end of Q3 2023.
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.
Dividend and Dividend Yield
SPGI's dividend history is accessible here. On September 27, 2023, SPGI declared its 4th consecutive $0.90 quarterly dividend payable on December 12 to shareholders of record on November 28.
When I last reviewed SPGI, shares were trading at ~$392 and the dividend yield was ~0.9%.
If SPGI announces a $0.09 dividend increase in late January (comparable to prior dividend increases), investors can expect the next 4 quarterly dividend payments to total $3.87 ((1 x $0.90) + (3 x $0.99)). Using the current ~$376 share price, the forward dividend yield is ~1%.
I expect that capital gains will continue to constitute the majority of SPGI's total future investment return.
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.
In Q2 and Q3 2023, the weighted average number of shares outstanding was 319.8 and 318.
During the 9 months ended September 30, 2023, SPGI purchased a total of 5.4 million shares for ~$2B of cash. During the 9 months ended September 30, 2022, it purchased a total of 29.5 million shares for $11B of cash.
Details of SPGI's stock repurchase programs, including accelerated share repurchase (“ASR”) agreements, commence on page 22 of 73 in the Q3 2023 Form 10-Q.
Valuation
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.
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.
When I wrote my February 10, 2023 post, SPGI had just reported FY2022 diluted EPS and adjusted diluted EPS of $10.20 and $11.19. The share price was ~$363.30 share price giving us a diluted and adjusted diluted PE of ~35.6 and ~32.5.
Management's adjusted diluted EPS guidance was $12.35 - $12.55. Using the $12.45 midpoint and the current ~$363.30 share price, the forward adjusted diluted PE was ~29.2.
The valuation based on broker guidance was:
- 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 was ~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 was ~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 was ~22.
On a GAAP basis, management's FY2023 projection was $8.65 - $8.85 in diluted EPS. Using the current $392 share price, the forward diluted PE range was ~44 - ~45!
Management's current forward adjusted diluted EPS guidance was $12.35 - $12.55. With shares trading at ~$392, the forward adjusted diluted PE range was ~31.2 - ~31.7.
Using SPGI's current ~$392 share price and current forward-adjusted diluted EPS broker estimates, the forward-adjusted diluted PE levels are:
- FY2023 - 22 brokers - mean of $12.53 and low/high of $12.41 - $12.70. Using the mean estimate and the current share price, the forward adjusted diluted PE is ~31.3.
- FY2024 - 22 brokers - mean of $14.47 and low/high of $14.02 - $14.72. Using the mean estimate and the current share price, the forward adjusted diluted PE is ~27.1.
- FY2025 - 17 brokers - mean of $16.42 and low/high of $15.83 - $16.82. Using the mean estimate and the current share price, the forward adjusted diluted PE is ~23.9.
With the release of Q3 and YTD2023 results, SPGI's revised FY2023 guidance is $8.75 - $8.90 in diluted EPS. Using the current ~$376 share price, the forward diluted PE range is ~42.2 ~43!
Management's revised FY2023 forward adjusted diluted EPS guidance is $12.50 - $12.60. With shares trading at ~$376, the forward adjusted diluted PE range is ~30 - ~30.1.
Using SPGI's current ~$376 share price and current forward-adjusted diluted EPS broker estimates, the forward-adjusted diluted PE levels are:
- FY2023 - 21 brokers - ~30 using a mean of $12.54 and low/high of $12.39 - $12.62.
- FY2024 - 22 brokers - ~26.1 using a mean of $14.39 and low/high of $13.96 - $14.82.
- FY2025 - 18 brokers - ~23.1 using a mean of $16.33 and low/high of $15.71 - $17.00.
Final Thoughts
There is a direct correlation between the results of SPGI's Ratings business and bond issuance volume. While this division's results have struggled in recent quarters, management is noticing an improvement of late. In addition, SPGI's recent global refinancing study indicates trillions of debt rated by SPGI matures over the next several years. Most of the ratings on this debt will need to be reassessed by SPGI.
One of SPGI's attractive features is that its ratings are widely accepted by asset owners and asset managers which is particularly important in cross-border bond issuance deals. A local country's domestic rating agency could have value for its domestic bonds. Global investors, however, require broad comparability across global bonds otherwise there is no way to determine if a bond with an identical rating is comparable in risk when issued in the different jurisdictions throughout the world. This is why it is essential corporate issuers obtain a rating on any debt issued. Furthermore, a bond issuer often pays 30 - 50 bps/year less when its bonds are rated by a market leader such as SPGI.
In addition to the 'stickiness' of SPGI's ratings, it has other divisions from which it can cross-sell its services. These divisions also generate recurring revenue which helps lower the volatility of SPGI's revenue.
I currently hold 350 shares in a 'Core' account and 200 shares in a 'Side' account within the FFJ Portfolio; SPGI was my 8th largest holding when I completed the mid-2023 Investment Holdings Review.
SPGI's share price was recently trending in the right direction (down) and reached ~$342 on October 27. Unfortunately, within a span of a few days, the share price has snapped back to ~$376 and shares are now fairly valued.
While SPGI is a great long-term investment, I am reluctant to recommend purchasing shares now. I recommend you consider acquiring shares in great companies when they appear to have temporarily fallen out of favour.
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.
