S&P Global - Wait For A Better Valuation

S&P Global (SPGI) is a great long-term investment but investors would be wise to wait for a better valuation.

I last reviewed SPGI in this May 5, 2022 post following the release of Q1 2022 results. My Final Thoughts in that post are:

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'.

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

Based on that analysis, I acquired 50 shares @ $361.16 in one of the 'Core' accounts within the FFJ Portfolio on May 3, 2022.

Following that purchase, SPGI's share price exhibited softness so I acquired another 50 shares @ $336.93 on June 1, 2022 in the same 'Core' account.

Fast forward to the latter part of June and SPGI's share price started to rise. This is likely because investors recognize SPGI's long-term wealth creation opportunities and viewed SPGI's valuation to be reasonably attractive.

On July 26, 2022, Moody's (MCO), SPGI's major competitor released Q2 2022 results in which it posted weak results in its Moody's Investors Services (MIS) segment. I reviewed MCO in this July 26, 2022 post and disclosed the purchase of an additional 50 shares on July 26 at $286.14.

SPGI has now released Q2 and YTD2022 results and has once again lowered its FY2022 outlook because of weakness in the Ratings segment.

Given that I continue to like SPGI's long-term outlook, my interest lies in determining if its valuation warrants the purchase of additional shares.

Financials

Q2 and YTD2022 Results

Comprehensive information about SPGI's Q2 and FY2022 results is found in the Form 8-K and Earnings Presentation which are accessible here and in the Q2 Form 10-Q.

SPGI - Division Financial Performance - Q2 2022

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

SPGI's Q1 2022 and Q1 2021 results are provided below for comparison purposes.

SPGI - Q1 2021 and Q1 2022 Financial Results

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

SPGI - Division Financial Performance - Q1 2022

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

Following the completion of the ~$43.5B merger with IHS Markit on February 28, 2022, SPGI's Balance Sheet is radically different from FYE2021. SPGI's Balance Sheet now reflects Goodwill and Intangible Assets totalling ~$54.5B and Total Assets of ~$64.3B (~$3.5B, ~$1.3B, and ~$15B at FYE2021). Long-term debt has also increased to ~$10.8B from ~$4.1B and Deferred Taxes have increased from ~$0 to ~$4.5B.

Despite these significant changes, SPGI's risk is still acceptable (see Credit Ratings section below).

During February - June 2022, SPGI completed 4 divestitures and used some of the sale proceeds to reduce debt. Details of these divestitures are found commencing on page 15 of 148 in the Q2 Form 10-Q.

SPGI - Adj Gross Leverage Within Current Target Range Q2 2022

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

The Q1 2022 cash position and leverage are provided below for comparison purposes.

SPGI - Cash Position and Leverage Temporarily Elevated

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

Much like MCO, SPGI's results in its Ratings division were negatively impacted by a significant reduction in global debt issuance.

SPGI - Decrease In Global Debt Issuance - Q2 2022

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

This is what SPGI presented in Q1 2022.

SPGI - Decrease In Global Debt Issuance

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

FY2022 Guidance

SPGI's Q2 2022 Earnings Presentation provides substantial information suggesting the long-term outlook of its Ratings business is intact.

The Ratings segment now forecasts a 16% decrease in bond issuance in FY2022.

SPGI - Global Issuance History and 2022 Forecast Q2 2022

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

In contrast, the forecast decrease in bond issuance was not nearly as significant as that presented in Q1 2022.

SPGI - Global Issuance History and 2022 Forecast

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

Given the short-term headwinds SPGI's Ratings segment is experiencing and can expect to experience in the next few quarters, SPGI has revised its FY2022 outlook.

SPGI - Updated FY2022 GAAP and Adj Pro Forma Guidance Q2 2022

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

The following is SPGI's guidance when it released Q1 2022 results.

SPGI - Updated FY2022 GAAP and Adj Pro Forma Guidance Q1 2022

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

Credit Ratings

The ratings assigned by Moody's and Fitch are stable and are the lowest tier of the upper-medium grade investment-grade category.

  • Moody's continues to rate SPGI's senior domestic unsecured debt at the A3 level.
  • Fitch continues to rate SPGI's senior domestic unsecured debt at the A- level.

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

More detail about SPGI's dividend and the dividend yield is found in my May 5, 2022 post.

On June 21, 2022, SPGI announced its second consecutive $0.85/share quarterly dividend would be distributed on September 12, 2022. With shares currently trading at ~$371, the dividend yield is ~0.92%.

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

I acquired 50 shares @ $336.93 in the same 'Core' account on June 1, 2022. The dividend yield based on this purchase price is ~1%.

The current dividend yield is slightly lower than at the time of my most recent 2 purchases.

I continue to expect that capital gains will 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.

Share repurchases in FY2018 – FY2020 amounted to $1.66B, $1.24B, and $1.164B. Share repurchases were suspended upon the announcement of the SPGI/IHS Markit merger. They, however, remain a component of SPGI’s total capital return program and management stated its plan to significantly ramp up share repurchases after the completion of the merger; the merger was completed on February 28, 2022.

Earlier in FY2022, SPGI announced a $12B Accelerated Share Repurchase (ASR) program. In the first half of FY2022, it repurchased 19 million shares for $8.5B of cash. The remaining $3.5B is expected to be completed by the end of 2022.

The following reflects the details of the YTD purchases.

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.

Management's revised adjusted diluted EPS guidance for FY2022 is now $11.35 – $11.55. Using the $11.45 midpoint and the current ~$371 share price, SPGI's valuation is ~32.4.

The valuation based on current broker guidance is:

  • 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.

The midpoint of management's FY2022 guidance is $11.45 but the FY2022 broker guidance is $11.77. This suggests that the broker guidance reflected above is very likely to be lowered over the next several days. If this does happen then SPGI's current valuation based on adjusted forward earnings estimates is higher than in recent months.

While the past does not predict the future, we can use historical data to aid us in determining what to expect.

Management's current FY2022 GAAP guidance is $10.20 – $10.40. Using a $10.30 midpoint and the current ~$371 share price, the forward diluted PE is ~36. Although the headwinds in the Ratings segment are temporary I think we should not overlook that a pickup in this segment's business is not expected until some time in FY2023.

Based on the following historical data, it would appear that SPGI's valuation is a bit rich. We also see that SPGI's low and high PE levels in a given year can fluctuate significantly. If we are patient, I think we may be presented with an opportunity to acquire shares at a more favourable valuation at a later date.

Final Thoughts

When I completed my Mid 2022 Investment Holdings Review, SPGI was my 10th largest holding. It was the 18th largest holding when I completed my early January 2022 review, the 21st largest holding in my mid-April 2021 review, and the 24th largest holding in my mid-August 2020 review.

Despite the headwinds in SPGI's Ratings segment, the business is not permanently impaired. This business is cyclical and we just happen to be in the 'down' part of the cycle; both SPGI and MCO expect this area of their business to pick up starting in FY2023.

I like SPGI's and MCO's long-term outlook and took advantage of a recent 'window of opportunity'. Now, however, this 'window' appears to have closed. Hopefully, the broad market uptick we are witnessing is not the beginning of a new 'bull market'.

I plan to wait for SPGI's valuation to improve before I add to my exposure.

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.