On Feb. 9, S&P Global Inc. (SPGI, Financial) released its fourth-quarter and full-year 2020 results. It grew both its top and bottom lines, with full-year revenue up 11% and adjusted diluted earnings per share up 23%.
It tentatively expects 2021 revenue to increase by mid-single digits, and its adjusted diluted earnings per share to increase from $11.69 to a range between $12.25 and $12.45. That would be an increase of 4.8% to 6.5% increase over 2020.
However, it is not offering GAAP guidance for 2021 because it expects to conclude a merger with IHS Markit Ltd. (INFO, Financial) in March. If the merger is approved by both parties, then there are tax and other implications that will affect future results.
What does all of this mean for investors with longer-term horizons?
What is S&P Global?
Based in New York, S&P Global is best known as a debt ratings agency and known infamously after the 2008 financial collapse. But the company is more than just ratings and operates with four reportable segments (six if the merger is completed):
- S&P Global Ratings ("Ratings"): Provides independent reports on credit ratings, research and analytics that help (or should help) investors make objective decisions about debt instruments, including bonds. It was the company's biggest source of revenue, bringing in $3.61 billion in 2020.
- S&P Global Market Intelligence ("Market Intelligence"): This segment earns revenue through subscriptions; the company says, "Market Intelligence's portfolio of capabilities are designed to help investment professionals, government agencies, corporations and universities track performance, generate alpha, identify investment ideas, understand competitive and industry dynamics, perform evaluations and assess credit risk." It produced $2.11 billion worth of revenue.
- S&P Global Platts ("Platts"): This division serves the energy industry; in its own words, "Platts provides essential price data, analytics, and industry insight enabling the commodity and energy markets to perform with greater transparency and efficiency." It is the smallest of the four segments by revenue, generating $878 million last year.
- S&P Dow Jones Indices ("Indices"): According to the company, "Indices' mission is to provide transparent benchmarks to help with decision making, collaborate with the financial community to create innovative products and provide investors with tools to monitor world markets." When investors direct their money into mutual funds or exchange-traded funds using one or more of the indexes, the company receives an asset-linked fee. This segment added $989 million in revenue.
IHS Markit
London-based IHS Markit, which is valued at $36.28 billion, wrote:
"We deliver data, insight, and software that combine our expertise, unique content sets, and leading technology to the world's major industries, financial markets, and governments. Our analytics reveal interdependencies across complex industries, which enhances transparency, reduces risk, and improves operational efficiency for our customers."
On Dec. 1, the two companies announced their intent to merge in a deal worth $44.50 billion.
In the news release, the companies wrote, "With IHS Markit, S&P Global could solidify its place as a leading global data provider at a time when traders, investors and executives are clamoring for as much information as possible about markets and companies."
They expect the deal to be accretive to S&P Global earnings by the end of the second full year after closing, and that the deal will reduce costs by about $480 million.
Competition
In its 10-K for 2019, prepared before the merger was a relevant issue, S&P Global reported that its peer group was made up of Moody's Corp. (MCO, Financial), CME Group Inc. (CME, Financial), MSCI Inc. (MSCI, Financial), FactSet Research Systems Inc. (FDS, Financial), IHS Markit Ltd. (INFO, Financial), Verisk Analytics, Inc. (VRSK, Financial) and Intercontinental Exchange Inc. (ICE, Financial).
Traditionally, Moody's has been the biggest competitor because Ratings was the biggest revenue-generating segment. In addition, Ratings also competed with Hearst-owned Fitch Ratings Inc., the smallest of the big three debt rating agencies.
According to the 10-K, S&P Global outperformed its peers and the S&P 500 over the five years ending Dec. 31, 2020 (dividends reinvested):
Fundamentals
S&P Global receives a middling score for financial strength; one of the factors pulling it down is debt. The cash-to-debt ratio of 0.67 means it cannot pay off its debt with the cash, cash equivalents and marketable securities it has on hand.
That is supported by the interest coverage ratio of 18.63; this tells us the company has a much higher operating income than interest expenses.
Both the Piotroski F-Score and the Altman Z-Score are relatively high; these measures of financial strength mean the company is performing well on the critical metrics defined by Professor Piotroski and is in no danger of going bankrupt.
As for the allocation of capital, management has done well, as the WACC vs ROIC chart shows. The weighted average cost of capital is 6.37%, multiples below the return on invested capital of 31.69%.
While the company is obviously doing well, it is not consistent in top and bottom-line growth. It has a predictability rating of just one out of five stars, indicating bumpy revenue and Ebitda per share results in the past.
The operating and net margins explain why S&P Global has such a lopsidedly positive ROIC versus WACC. Both are high when compared with both the capital markets industry and its own history. That's not surprising when we recognize that S&P Global is the biggest player in an oligopoly of just three rating companies (and many debt issuers require ratings from two of the three companies).
Turning to the unbelievably high return on equity, GuruFocus explains:
"ROE % is calculated as Net Income attributable to Common Stockholders (Net Income minus dividends to participating security holders) divided by its average Total Stockholders Equity over a certain period of time. S&P Global's annualized net income attributable to common stockholders for the quarter that ended in Dec. 2020 was $1,816 Mil. S&P Global's average Total Stockholders Equity over the quarter that ended in Dec. 2020 was $476 Mil. Therefore, S&P Global's annualized ROE % for the quarter that ended in Dec. 2020 was 381.91%."
Well, it partially explains—the ROE page arrives at a different number from the one shown on the table. Both numbers are too high to be helpful analytical markers.
The three growth lines are more earthbound than the return on equity. And, with three-year Ebitda and earnings per share growth greater than revenue growth, the company is efficiently using the revenue that comes in its door.
Dividend and share repurchases
S&P Global pays a modest dividend, with a yield that has suffered because of the higher share price:
Still, the dividend payout ratio is relatively low and the company has increased the dividend quite quickly over the past three years.
Additionally, it has dedicated some of its cash flow to lowering the number of shares outstanding, which results in higher returns for shareholders:
Valuation
Thanks to a pullback, the shares are not as overvalued as they had been recently:
The GuruFocus Value Chart gives S&P Global a rating of modestly overvalued.
The same might be said of the price-earnings ratio of 35.08. This price-earnings ratio is more than double the 17.61 median of the industry and above its own 10-year median of 22.56, but well below its 10-year high of 519.32.
The PEG ratio, calculated by dividing the price-earnings ratio by the five-year Ebitda growth rate, comes in at 3.35, which is well above the fair value mark of 1.
The price-book ratio is extremely high at 160.77.
Given its low predictability score, we will not try to use discounted cash flow analysis.
Gurus
The gurus have done more selling than buying of S&P Global shares over the past two years:
Still, it has a respectable following among the gurus, with 22 of them holding positions at the end of the third quarter. The three biggest stakes belonged to:
- Spiros Segalas (Trades, Portfolio) of the Harbor Capital Appreciation Fund; after a reduction of 7.73%, he held 1,269,823 shares, representing a 0.53% stake in S&P Global and 1.12% of his fund's total assets.
- Pioneer Investments (Trades, Portfolio) owned 1,085,702 shares after adding 10.16%.
- Daniel Loeb (Trades, Portfolio) of Third Point held 775,000 shares and made no changes during the quarter.
Conclusion
S&P Global is a strong and highly profitable company, with its main line of business in an oligopoly of just three players. That will change somewhat if the merger with IHS Markit proceeds, but overall, its competitive position will strengthen and its financial strength should grow as well. Therefore, it is a stock worth considering for longer periods.
To own the stock, though, you will need to pay a popularity premium—while revenue and earnings may have been bumpy over the past decade, the share price has grown quite consistently and on the same upward trajectory.
This makes it a prospect for growth investors willing to do more due diligence. There appears to be little likelihood of this stock hitting a price that gives value investors a margin of safety in the near future. And that increasing share price makes it hard for income investors to get a reasonable dividend.
Disclosure: I do not own shares in any of the companies named in this article and do expect to buy any in the next 72 hours.
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