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I last reviewed S&P Global (SPGI) in my February 10, 2023 post at which time I passed on acquiring additional shares in the hope of being able to acquire additional shares in the future at a more favourable valuation.
SPGI has now released its Q2 and YTD2023 results on July 27. This is an opportune time to determine if I should add to my exposure.
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
Q2 and YTD2023 Results
The quarterly earnings material is accessible here.
The following provides a very high-level overview of SPGI's Q2 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.
The firm continues to see high customer retention rates and contract expansions as evidenced by an 8% growth in subscription revenue across the five divisions.
However, not all news is good news!
SPGI's Ratings division typically generated the most Revenue and Operating Profit with the Market Intelligence division coming in 2nd. The operating results found below, however, reflect just how difficult the operating environment has been for the Ratings division.
Leverage
SPGI's adjusted gross leverage to adjusted EBITDA target is 2.0x – 2.5x. This ratio has deteriorated slightly over the past few quarters and when we compare SPGI's Q2 2023 adjusted gross leverage to that in Q4 2022, we see a further slight deterioration.
The company, however, is fully committed to maintaining an investment-grade rating and restoring the ratio to within the target range.
Source: SPGI - Q4 2022 Earnings Presentation - February 9, 2023
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 - Q2 2023 Earnings Supplemental Disclosure - July 27 2023
Source: SPGI - FY2022 Earnings Release - February 9, 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. We quickly see the extent to which the Ratings division has suffered over the past few quarters.
Source: SPGI - Q2 2023 Earnings Supplemental Disclosure - July 27 2023
FY2023 Guidance
In February 2023, SPGI did not provide 2023 GAAP guidance because management could not reliably predict all of the necessary components of GAAP measures given the inherent uncertainty around the timing of the divestiture of Engineering Solutions. At the beginning of May 2023, SPGI completed the sale of its Engineering Solutions business to investment funds managed by KKR. FY2023 GAAP guidance is now provided.
Source: SPGI - Q2 2023 Earnings Supplemental Disclosure - July 27 2023
At the beginning of Q2 2022, management took decisive action to protect margins. This has resulted in a modest contraction in YoY adjusted operating margins.
The plan is to continue to prudently manage capital allocation. Management's expectations are for positive revenue growth in all divisions for the remainder of FY2023 and double-digit adjusted EPS growth.
Source: SPGI - Q2 2023 Earnings Supplemental Disclosure - July 27 2023
Source: SPGI - Q2 2023 Earnings Supplemental Disclosure - July 27 2023
SPGI still sees many of the same macroeconomic factors impacting its business through the remainder of the year. Although a technical recession globally is expected, there is an expectation that headwinds will persist primarily in financial services end markets. As a result, near-term volatility will likely impact different parts of the business in different ways.
The Ratings division of SPGI's business has experienced weakness over the last few quarters. However, SPGI completed its July 2023 global refinancing study. 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 Ratings.
For comparison purposes, I following is the FY2023 adjusted guidance that SPGI provided in early February 2023.
Source: SPGI - Q4 2022 Earnings Presentation - February 9, 2023
Source: SPGI - Q4 2022 Earnings Presentation - February 9, 2023
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.
Dividend and Dividend Yield
SPGI's dividend history is accessible here. On June 27, 2023, SPGI declared an $0.90 quarterly dividend payable on September 12 to shareholders of record on August 28.
When I last reviewed SPGI, shares were trading at ~$363.30 and the $3.60 annual dividend yielded ~1%. Shares now trade at ~$392 and the dividend yield is ~0.9%.
I expect one more $0.90 dividend to be declared in late September for distribution in mid-December. 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 $3.78 ((2 x $0.90) + (2 x $0.99)). Using the current ~$392 share price, the forward dividend yield is ~0.96%.
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 2023, the weighted average number of shares outstanding was 319.8.
Details of SPGI's stock repurchase programs, including accelerated share repurchase (“ASR”) agreements, commence on page 21 in the Q2 2023 Form 10-Q.
Valuation
In my October 31, 2022 post, I review SPGI's valuation at the time of several previous SPGI posts.
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 given 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 is $8.65 - $8.85 in diluted EPS. Using the current $392 share price, the forward diluted PE range is ~44 - ~45!
Management's current forward adjusted diluted EPS guidance is still $12.35 - $12.55. With shares currently trading at ~$392, the forward adjusted diluted PE range is ~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.
Either SPGI was undervalued when I wrote my February 10, 2023 post or SPGI is currently overvalued. In my opinion, SPGI is currently overvalued.
Final Thoughts
SPGI was my 8th largest holding when I completed Mid 2023 Investment Holdings Review and my January 2023 Investment Holdings Review; my SPGI exposure is reflected in the monthly FFJ Portfolio reports.
The sharp share price pullback following the release of Q2 2023 results is not sufficient to bring SPGI's valuation to a level at which I would consider adding to my exposure.
The challenge lies in that SPGI's share price has appreciated from ~$335 at the beginning of 2023 to ~$428 before the release of Q2 results. Comparing FY2023 guidance when I wrote my February 10 post to guidance provided on July 27, I see nothing that would justify a ~$93 share price appreciation (~28%). I suspect the run-up in the share price may have been because investors were anticipating superior results to those provided.
Although SPGI is a great company, I can not justify the current valuation. I will direct my attention elsewhere but will continue to monitor SPGI in the hope of a superior valuation.
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.
