S&P Global Analysis
S&P Global, formally known as McGraw Hill has its roots back in the mid-, to late 1800’s. After a string of acquisitions and mergers, the company became the company we know today under the name S&P Global.
In 2022, S&P Global merged with IHS Markit, this will come back a lot in this report as it had been an incredibly big merger. The total deal value was $44 billion and had a lot of short-term implications due to overlapping businesses and employee tasks. The merger contributed for a large part to revenues jumping 35% for S&P Global to $11.18 billion ('22), from $8.3 billion ('21)
This report is set up in the following order:
- Services
- Executives
- Balance Sheet Comments
- Bull vs Bear Arguments
- Conclusion
Feel free to skip parts to read the sections that interest you the most.
What Services Does The Company Offer?
Product Description
S&P Global breaks its revenues down into 5 categories. Indices, Mobility, Commodity Insights, Ratings, Market Intelligence. As of May 2023, the company completed the sale of Engineering Solutions. The company offers various products, mostly regarding financial markets or financial efficiency. This is mostly done through software solutions, and for a large part in the form of a subscription, or periodically billed model. The 5 categories to which the company is divided can be explained as follows:
Market Intelligence
The market intelligence business line brings multi-asset-class data and analytics with purpose-built workflows. This includes:
Desktop, a product suite that provides data, analytics, and third-party research for global finance and corporate professionals
Data & Advisory Solutions, A broad range of research, reference data, market data, derived analytics, and valuation services covering both the public and private capital markets. This is delivered through flexible feed-based or API delivery mechanisms.
Enterprise Solutions, Software, and workflow solutions that help our customers manage and analyze data. The software identifies risks, helps to reduce costs, and meet global regulatory requirements.
Credit & Risk, Commercial arm that sells ratings, credit ratings and related data and research, advanced analytics, and financial risk solution
Market intelligence offers a lot of recurring, subscription revenue. This comes mostly from the distribution of data, valuation services, analytics, third-party research, and credit rating-related information.
Ratings
The part of the company that is probably best known. Ratings are the part of the business where S&P Global offers their opinion about the ability and willingness to repay debt that a company takes out. It's an opinion score that helps to judge the risks of a debt issuer.
Ratings can be divided into two parts for their revenues, transaction, and non-transaction revenue.
Transaction is for the rating during the issuance of debt, so for new corporate, or government debt instruments, but also bank loan ratings.
Non-Transaction is the part that includes fees for the surveillance of a credit rating. These are annual fees for customer relationship-based pricing programs, fees for entity credit ratings, and global research analytics at CRISIL.
Commodity Insights
Commodity Insights is a provider of information and benchmark prices for the commodity and energy markets. It provides price data, analytics, industry insights, and software & services, enabling the commodity and energy markets to perform with greater transparency and efficiency. Key customers served by Commodity Insights include producers, traders, and intermediaries within energy, petrochemicals, metals & steel, and agriculture.
Commodity Insights includes the following business lines:
Energy & Resources Data & Insights, includes data, news, insights, and analytics for petroleum, gas, power & renewables, petrochemicals, metals & steel, agriculture, and other commodities
Price Assessments, includes price assessments and benchmarks, and forward curves
Upstream Data & Insights, includes exploration & production data and insights, software and analytics
Advisory & Transactional Services, includes consulting services, conferences, events, and global trading services.
Commodity Insights’ revenue is generated primarily through the following sources:
Subscription revenue, from subscriptions to our market data and market insights (price assessments, market reports, and commentary and analytics) along with other information products and software term licenses
Sales usage-based royalties, from licensing our proprietary market price data and price assessments to commodity exchanges
Non-subscription revenue, conference sponsorship, consulting engagements, events, and perpetual software licenses.
Mobility
Mobility is a provider of solutions that serve the entire automotive value chain. This includes vehicle manufacturers, automotive suppliers, mobility service suppliers, retailers, consumers, and finance and insurance companies.
Mobility includes the following lines of business:
Dealer, provides analytics to predict future buyers, targeted marketing, and vehicle history data to allow people to shop, buy, service, and sell used cars.
Manufacturing, Provides insights, forecasts, and advisory services spanning the entire automotive value chain, from production planning to sales and marketing.
Financial, provides reports and data feeds to support lenders and insurance companies.
Mobility provides both a recurring, as well as non-recurring revenue stream. This gets broken down into:
Recurring, almost everything S&P Global does under the Mobility business line holds recurring revenue, the company specifies to whom they offer information. This is all global OEMs, most of the world's leading suppliers, and the majority of North American dealerships.
Non-recurring, One-time transactional data, usually tied to underlying business metrics, such as OEM marketing spend or safety recall activity, as well as consulting, or advisory services.
Indices
The part where most people will have seen the S&P Global products first. Indices is a global index provider maintaining a wide variety of valuation and index benchmarks for investment advisors, wealth managers, and institutional investors. Indices derive revenues from asset-linked fees when investors direct funds into its designed or owned indexes, indices generate revenue from the following sources:
Investment vehicles, Asset-linked fees such as ETFs and mutual funds, which are based on the S&O Dow Jones Indices benchmarks that generate revenue through fees based on assets and underlying funds.
Exchange-traded derivatives, generates sales usage-based royalties based on the trading volume of derivatives contracts listed on various exchanges.
Index-related licensing fees, fixed or variable annual and per-issue asset-linked fees for over-the-counter derivatives and retail-structured products
Data and customized index subscription fees, fees from supporting index fund management, portfolio analytics, and research.
As previously mentioned, S&P Global also held an Engineering Solutions business line. This was sold on May 2nd, 2023, so it will still have an impact on 2023 numbers, but will not be necessary to dive into as it will not be contributing to future results.
Sales channels
The company has a breakdown of various types of revenue. A breakdown is provided in the figure below, together with the revenue growth YoY per revenue type
Figure 1, Various Types Of Revenues And Sales Regions
These pictures show that total revenue has increased by 12%. This can be broken down to 12% growth in subscription revenue, 16% in non-subscription revenue, 5% in non-transaction revenue, Asset-linked fees were flat, Sales usage-based revenue was up 22%, and the recurring variable was up 31%.
S&P Global continues to specify that the increase in subscription revenue mainly comes from the impact of the IHS Markit merger. The increase of 12% was higher originally, however, it was held down due to the sale of the engineering Solutions.
Non-subscription revenue has the same story, an increase due to the merger with IHS Markit, which was offset by the sale of Engineering Solutions on May 2nd, 2023.
Non-transaction revenue increased because of an increase in surveillance revenue and an increase in revenue at the CRISIL subsidiary. This was partially offset by a decrease in new entity credit ratings.
Asset Linked fees remain flat on the year. Sales Usage-Based Royalties increased due to increased due to higher exchange-traded derivative revenues at indices.
Recurring Variable Revenue increased due to the merger with IHS Markit and fixed income new issuance volume.
Main sales regions
Most of the revenues of S&P Global are coming from the United States, about 60% of it, the other 40% is split between the rest of the world. International revenue is divided between European region (23% of revenues), Asia (11% of revenues), and Rest of the world (6% of revenues)
Who Are The Managers?
CEO – Douglas L. Peterson
Douglas has been CEO of S&P Global for 10 years, as he first joined the company as President in 2011, and took on the CEO role in November of 2013. Before joining S&P Global, Douglas was with Citibank for more than 25 years with the most notable roles being CEO of the Japan department from 2004, until 2010 before becoming the Citibank CEO until 2011 when he joined S&P Global.
Outgoing CFO – Ewout L. Steenbergen
Ewout Steenbergen is not the CFO anymore but has been until March ‘24. Therefore I do want to mention him. Ewout has left the company in order to become CFO at Booking Holdings. Before leaving the company, one of his tasks was working towards a smooth transition for the new CFO
Interim CFO – Christopher F. Craigh
Cristopher Craig joined the company in 2010, after being an audit Partner at Grant Thornton. Christopher Craig has been Chief Accounting Officer since 2018, and is now Christopher is also the Interim CFO.
President, S&P Global Market Intelligence – Adam Kansler
Adam Kansler has not been with the company for very long, about two years now, which makes sense as he came in with the merger with HIS Markit. Adam has been president of financial services since 2018. Kansler joined Markit in 2009 as Chief Administrative Officer.
President, S&P Global Ratings – Martina L. Cheung
Chueng joined S&P Global in 2010 as VP of Operations Structured Finance. Since joining the company, she has worked her way up to president of Global Ratings. Chueng has been with S&P Global for almost 15 years now.
President, S&P Global Commodity Insights – Saugata Saha
Saugata Saha joined S&P Global after being at McKinsey for 6 years. The switch to S&P Global happened in 2014, and after holding various positions, Saha became President of Commodity Insights in 2021 and has been holding this position for 3 years.
President, S&P Global Mobility – Edouard Tavernier
Tavernier is another executive who came from the merger with HIS Markit, where he had been for 11 years before the merger in 2022. Tavernier held the position of Executive Vice President, Head of Transportation. After the merger in 2022, he became President of Global Mobility.
CEO, S&P Dow Jones Indices – Dan Draper
Draper is quite a busy man, as he is on the boards of multiple companies. Draper joined as CEO of S&P Dow Jones Indices in 2020. Before joining S&P Dow Jones Indices, he held the position of managing director and global head of exchange-traded funds at Invesco.
Highlights From The Balance Sheets
Gross Margins | Net Margins
2019: 73.12% | 31.69%
2020: 71.89% | 31.43%
2021: 73.54% | 36.45%
2022: 66.32% | 29.05%
2023: 66.86% | 21.01%
Net Margins in 2022 were helped by dispositions. Furthermore, the company operates a capital-light business model.
Other items
As a software company, they don't have inventories, so this can not cause any issues. Accounts receivables are runner up quite quickly however, as this is now at $2.826 billion, compared to $2.494 billion ('22), $1.650 billion ('21), and $1.593 billion ('21). This might be due to the IHS Markit merger, but it is something to keep an eye on. Cash has taken a large hit in '22, due to the merger. S&P Global still has $1.3 billion on the balance sheet.
Debt Lines
The company has $11.412 billion in long-term debt, with $47 million in short-term debt. When we detract the cash, and short-term investment from it, this brings S&P Global to a Net Debt of $10.142 billion. Free Cash Flow was $3.567, meaning they have 2.84 times Net Debt/FCF. This is towards the higher side, but this is due to the merger with IHS Markit that keeps coming back.
When looking at Goodwill, this is where we can also point to the merger again. S&P Global has $34.850 of Goodwill on the balance sheet, this is once again due to the merger. In '21, the year before the merger, Goodwill on the balance sheet was $3.506 billion, meaning it is not from all kinds of small, overvalued acquisitions or IP, but a recent, major merger. Total Assets are $60.589, meaning Goodwill made up 57.5% of it.
Stock-Based-Compensation
S&P Global has some SBC, but a very low number of it. During '23, the company issued $171 million of SBC, which consisted of employee grands, but also severance packages as they are still working on efficiencies from the merger. SBC also came down from last year when the total SBC expense was $214 million.
Free cash flow came out to $3.567 million, which means that SBC made up 4.8% of free cash flows, a number under 10% is considered good here.
Cash Flows
Cash Flow from Operating Activities increased by 42.5% in '23, when compared to '22. This can be attributed to a decrease in costs from the IHS Markit merger.
Cash Flow from Investing Activities decreased dramatically, or so it seems. What happened here is that S&P Global sold a bunch of businesses, including CUSIP Global Services, and Oil Price Information Services.
Cash Flow for Financing Activities primarily consists of cash used for share repurchases, dividends, and the repayment of short-term, as well as long-term debt. The decrease in financing activities is due to a slowdown in share repurchases, as the company was buying back loads of stock that were issued for the merger with IHS Markit.
Competitors
Moody’s
Moody's is the biggest competitor that isn't one at all. Sounds a bit strange, doesn't it? This is due to the mechanics of the ratings business. In a very basic explanation, when a company has their debt rated by either Moody's, or S&P Global, their debt rating becomes more trustworthy, therefore being “cheaper” to issue. When both companies have rated the debt, the issued debt will be priced even lower. This results in the situation were going for a cheaper alternative, which will result in having to pay higher interest rates, thus making debt more expensive. In terms of market dynamics, both Moody's and S&P Global hold a 40% market share, the third largest player in the industry is Fitch at 15%.
Bloomberg
When it comes to market intelligence, Bloomberg is a big competitor of S&P Global. Both go after the same level of clients as they are very high up market. These are not your average retail investor market data platforms. Bloomberg is also by far the market leader in this space with about 33% market share (Wallstreetprep, 2024). S&P Global's Capital IQ is supposed to have a 6% market share according to that same article. The Bloomberg Termin should cost about $25.000 per year. Capital IQ pricing is a bit more difficult as it depends on the customer's needs. After digging around a bit this article talks about $17.000 per year (BlueGamma, 2024), seeing competitors’ pricing, between $15.000 and $20.000 per year seems plausible.
MSCI
MSCI is another very large player in the indices game, as it holds the MSCI world index. The MSCI world index often gets compared against the S&P500, but these are totally different indices. There is not really a competitiveness between the two companies as they both target different types of audiences with the MSCI world index being way more diversified.
Bull vs Bear Arguments
3 Bullish Arguments
1. IHS Markit merger gives new runway of bottom-line growth (due to mature market, revenue bump)
The merger between HIS Markit, and S&P Global unlocked $3 billion in revenues for S&P Global. This is quite a bit, but the company also needed to pay up for it as the merger was valued at $44 billion. Due to the large synergies between the two companies, it provides for a large runway of net income, and EPS growth.
2. Corporate debt duopoly, very secure market dynamics that are not likely to change
Due to the market dynamics within the debt rating industry, the duopoly that S&P Global and Moody’s hold is very unlikely to change. The only other semi-competitor in the market only holds a 15% market share, compared to the 40% S&P Global, and Moody’s hold. Because of the duopoly these companies hold, and the continued payments these debt ratings have in order to maintain the rating, the margins of this business are very high, as the operating margin for the ratings business came in at 56% in ’23.
3. Working hard to decrease debt
3 Bearish Arguments
1. Operates mostly in quite mature markets
It will be hard for S&P Global to realize fast organic growth as the company operates in a lot of reasonably mature markets. For example, the debt ratings increase slowly with the pace of the overall markets. S&P Global can be expected to grow revenues by about 10%-12% per year. Over the past 10 years, the company also grew revenues at a 10% CAGR.
2. For strong outperformance dependent on share buybacks and increasing margins
Due to the revenues only slightly outpacing the average of the S&P 500, investors are dependent on increasing margins in order for the company to have strong outperformance over the market that can be attributed to income growth.
3. Data Analytics, their highest revenue line of business is very competitive
The Data analytics side of the business is very competitive, with a couple of big players sharing the market, the only issue with this is that S&P Global holds a smaller market share in this industry.
Conclusion
On a year-to-date basis, S&P Global has returned around a negative 3%, this is as we are going towards Q1'24 earnings. On a 5-year basis, the company returned 98%, or about 14.75% per year excluding dividends.
As a comparison, the S&P500 returned 78% in the same time period according to Tradingview.
Past performance is no guarantee for the future of course, but it can tell you something about the strength of a business.
When we look at the revenue, and EPS projections both 2, and 5 years out. We can see that analysts have them doing $13.4 billion of revenues in '24, $14.48 billion in '25, and $17.15 billion in '28.
The EPS numbers we can see from analysts are $14.04 in '24, $16.00 in '25, and $21.83 in '28.
Projecting 5 years out is not as reliable, however, as a lot can happen in that time.
What we know from S&P Global is that this is a very stable business that is fairly mature but has plenty of levers for growth to pull. Due to the recent merger with IHS Markit, the company has made a jump in revenues. As they have been working to maximize the synergies, they see that they have underestimated them slightly which is a positive as this will bring more profits after efficiencies have been maximized.
S&P Global is a stock I like due to the growth opportunities it presents together with its stable nature. It's a very high-quality company, which is why it can be expected to trade at a slightly higher PE. It is also not a company that should be expected to have blow-out earnings or sudden accelerations in growth, what should be expected is an increased level of growth in free cash flow per share when compared to the average S&P500 company and therefore, when bought for the right prices, to outperform the index.
Disclaimer:
By reading this report, you will have a solid basic understanding of the company. Investment decisions should be yours and not solely based on this report. This report is neither a buy, nor sell recommendation as these decisions should be yours, and yours only.
