Is S&P Global Undervalued? Breaking Down the Numbers & Concerns
Analyzing SPGI's Competitive Moat, Financial Strength, and Future Growth.
Business:
S&P Global provides credit ratings, benchmarks, analytics, and workflow solutions across three key markets: capital, commodities, and automotive. The capital markets include asset managers, investment banks, commercial banks, insurance companies, exchanges, trading firms and issuers; the commodity markets include producers, consumers, traders and intermediaries within energy, chemicals, shipping, metals, carbon and agriculture; and the automotive markets include manufacturers, suppliers, dealerships, service shops and customers.
Five businesses: S&P Global Market Intelligence (“Market Intelligence”), S&P Global Ratings (“Ratings”), S&P Global Commodity Insights (“Commodity Insights”), S&P Global Mobility (“Mobility”) and S&P Dow Jones Indices (“Indices”).
Key Financial Metrics:
Price: $486.49
Market Cap: $149.74 billion
Shares: ~307,800
FCF/Share: 18.07
FCF Yield: 3.72%
SBC Adjusted FCF/Share: 17.04
SBC Adjusted FCF Yield: 3.55%
Forward FCF/Share = 19.49
FWD FCF Yield: 4.01
Potential Concerns: Addressed Below
Recent increase in debt.
Debt vs Cash levels.
Recent drop in ROCE.
Recent increase in share dilution.
Slow growth & opportunity cost.
Company Highlights:
Strong Brand: Despite 2008, company remains resilient through worst case crisis scenario.
Oligopoly - monopolistic with STRONG barriers to entry.
Commitment to return of capital to shareholders.
Historically High Return on Capital Employed.
Requires very little capital expenditures to operate.
High recurring subscription revenue.
Strong network effects of data.
Pricing power& inflation protection.
High and strong margins.
Potential for accelerated growth in margins utilizing AI in rating through automation of ratings workloads.
S&P Global, along with Moody’s and Fitch, forms an oligopoly in debt ratings. Because issuers receive lower interest rates when using these agencies, switching costs are high. A new competitor would have to pay issuers just to be considered—making it nearly impossible to disrupt this dominance. Even then, due to the common accepted debt-rating language, it would remain unappealing.
Visualizing the oligopoly:
2024 Earnings Release Highlights:
Forecast 6 billion dollars of Free Cash Flow in 2025
Upcoming Potential Debt Reissuance Cycle
Addressing the Debt Question:
SPGI recently acquired IHS Markit using debt, but as the integration settles, cash flow is expected to increase. The company has publicly committed to buying back the shares issued for the acquisition, prioritizing shareholder value and reducing dilution.
Not all debt is bad when used strategically. With approximately $7 billion in EBITDA and $11.39 billion in total debt, SPGI’s debt-to-EBITDA ratio remains well below my threshold of “Debt < 3x EBITDA.”
Given this, SPGI could easily accelerate debt repayment if necessary. With a healthy $5.5 billion in free cash flow (FCF) last year and a manageable interest expense of around $300 million annually, I don’t see the debt as a significant concern.
In addition, SPGI’s debt maturities are spread out over the next decade, and the majority have low, manageable interest rates. See below.
Debt Maturity and Interest Rates:
Addressing the ROCE Question:
In addition to the increased debt burden, the recent large acquisition of IHS Markit has impacted the Return on Capital Employed of SPGI. SPGI historically has had a consistently high ROCE, with a 5-year average of 24.14% and a LT 10-year average of 31.53. See below charts.
5 Year Return on Capital Employed: Average of 24.14% (includes recent drop due to IHS acquisition)
Return on Capital Employed dropped after the acquisition due to the premium paid for acquired assets—classified as intangibles. These intangibles immediately result in lower ROCE because SPGI technically ‘overpaid’ for the assets (a common effect in acquisitions).
Intangible assets increase capital employed without an immediate earnings boost. These appear on the Balance Sheet but are gradually amortized, meaning they reduce Net Income over time as an expense on the Income (Operations) Statement.
Think of it like this, when a company purchases another company - it doesn’t simply purchase the assets at market value, it pays a premium to account for things like brand, trademarks, customer lists and relationships, etc. As these have value beyond a single event, the purchase value is amortized over a specified period of time and the burden on the Income Statement spread over that period of time through Amortization.
This amortization impact on Net Income will consistently decrease moving forward.
Of note - my point isn’t intended to say current ROCE is an inaccurate reflection. SPGI is experiencing lower ROCE, the question becomes if the acquisition is/will be worth it and generate a compensatory return moving into the future.
In this case, I feel the acquisition was accretive and trust in SPGI management’s use of Capital based on their historical record.
See Merger Slide Deck for more details: S&P Global Post-Close Investor Call
Intangible Assets associated with Acquistions:
Upcoming Amortization Schedule
Additional insight on Acquistion:
With the Acquistion, there was share dilution. SPGI has committed to utilizing 85% or more of Free Cash Flow to issue dividends and repurchase shares. Also note there is an accelerated share repurchase to make haste in repurchasing shares issued to facilitate the acquisition and remove the dilution shareholders experienced.
Share dilution in question - note immediate ongoing reduction in shares.
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Let’s Review SPGI Company Estimates and Outcomes:
SPGI has consistently made conservative estimates and guidance for future years while having a history of meeting and beating those estimates.
Note on using Adjusted Non-GAAP EPS: See the below breakdown of non-GAAP EPS adjustments for the FY2025 guidance. the vast majority of SPGI adjustments are related to the above-described acquisition via Deal-related amortization.
Valuation:
Keep in mind that all of my calculations are estimates, intended to provide general guidelines for my personal decision-making.
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