S&P Global: A Fantastic Company Priced Out Of Reach
- We're all familiar with S&P's Indices division, but that's actually the smallest of the bunch. S&P is a diversified financial research agency operating around the globe.
- After returning 48% over the last year, I dig in to see if there's any value left for us to cling onto, or if we must wait for a pullback.
- The median valuation comes in at $319, below where S&P Global is trading today.
- I do much more than just articles at High-Quality Hideaway: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »
Image: S&P Global Logo
I have long believed that high-quality can be bought at almost any point in time. If one holds onto that high-quality firm, they will see a return that beats the market because others will continue to invest and seek that high-quality for themselves. Thus, today, I want to take a look at a high-quality firm that you're almost certainly aware of, S&P Global (NYSE:SPGI).
Over the last year, this $80B company has returned 48% to investors by way of price gains. Add to that the small dividend and some reasonable buybacks, and it has been a good year, despite the dips.
Today, S&P Global trades at all-time highs. Is it reasonable to expect we can get in at these levels and make a market-beating return? Let's explore.
An Overview of S&P Global
As an investor, you're likely familiar with the S&P brand, but the firm does an awful lot more than place its name on an index. Founded in 1925, S&P Global offers ratings, analytics, and data services that cover equities, commodities, and bonds worldwide.
Image: SPGI Revenue Breakdown
All told, there are four distinct operating segments within S&P Global. The largest is "Ratings." This segment was responsible for almost 50% of all revenues in 2019. As the name indicates, this segment of S&P is responsible for providing credit ratings, benchmarks, and research to investors worldwide.
Market Intelligence made up roughly 30% of 2019's revenues. This segment helps investment firms, endowments, and other large investment arms make decisions. Services and software provided through this segment also help investment decision-makers manage risk and keep abreast of the markets.
Platts, a unique name for a segment, is S&P's provider of energy and commodity information. The segment covers metals, agriculture, shipping, and energy-related markets such as natural gas, oil, and coal. It is responsible for roughly 13% of S&P Global's revenues.
Finally, the segment that most people are likely familiar with, Indices. Indices makes up roughly 13% of revenues by maintaining a wide variety of benchmarks around the globe.
These four segments form one of the financial world's largest and most trusted providers of data. The name recognition and trust across the financial landscape help S&P Global maintain a fantastic moat that is unlikely to be eroded in the near term.
Continuously Surpassing Estimates
One reason that S&P Global commands such high price multiples is the consistent estimate beats, and significant growth put up in both sales and EPS over the past few quarters. That was no different in the company's most recent report to end off Q1 2020.
Image: SPGI Global Quarterly Basic EPS
Basic EPS was reported at $2.64 in Q1, which was a 59% improvement year-over-year. Revenues over the same period grew by 13.7% to $1.79B.
Image: SPGI Quarterly Revenues
Looking at revenues for a moment, Ratings and Indices drove most of the growth. Ratings saw revenues of $825M during the period, a 19% year-over-year increase. This gain was primarily thanks to record issuance in March around the world. Indices saw revenues grow by 20%.
Of course, the part we all love is those margins. For a company in the financial sector, S&P has some fantastic margins, which improved further in Q1. The company's operating margin came in at a solid 53.1%, again driven primarily by Ratings (with a 63.1% margin) and Indices (with a 70.6% margin).
However, Things Were Not All Rosy
We should talk briefly about the company's guidance. S&P Global lowered annual EPS guidance from $10.40-$10.60 down to $9.95-$10.15. This lowering of guidance did not put a damper upon recent gains, however.
If we take S&P at its word, a $9.95 EPS would mean the company is trading at 33x forward earnings today. On the top side, the company is trading at 32.3x. So, we're looking at buying one of the finance world's biggest names for 32-33x forward earnings.
Taking a look at the last year, we can see that 32x isn't that out of the ordinary. SPGI traded at an average of 31.3x over the trailing-twelve-months. The median value is 31.55x. So, on a price front, we're not paying significantly more than we would have paid at an average point throughout the past year. Should we pay it?
No matter how good things look, it always comes down to the valuation. If we don't feel comfortable with our valuation, we'll never feel comfortable holding a stock when it faces macroeconomic turmoil, as we saw in March.
Unfortunately, no matter which way I wring the numbers out, I am unable to reach a comfortable valuation that gives us a margin of safety.
First, we should address growth. For my valuation, I have assumed 9% growth. This is, in my opinion, on the higher side of things. Over the last four years (five years ago, net income was negative), SPGI has grown net income at 16% CAGR. Last year it was roughly 8.4%. My 9% value assumes the operating margins will continue to expand, and demand will increase for S&Ps products (both of which are factors we see today).
Second, my discount rates. I use between 8 and 12%, depending on how secure the company is. SPGI is a stable global brand. It is operating in growing segments, and we're not seeing a secular decline from its business. That's why I am erring towards the lower end of discount rates for my valuations.
Taking the top-end of EPS guidance at $10.15 for 2020 and growing that amount at 9% annually for five years (4% after that) gives us a $291.49 valuation at an 8.5% discount rate. SPGI trades a little differently to the stocks we'd traditionally use a DCF model on, so let's look at some other methods.
One option is to take the analysts at their word. The median forecast today is $329, but this still does not give us a reasonable margin of safety (0.33%).
Finally, we could value SPGI on a multiples basis. Comparable peers include Morningstar (MORN), Intercontinental Exchange (ICE), FactSet Research (FDS), Moody's (MCO), and MSCI (MSCI). The median PE across these firms is Moody's 34.14. SPGI's $10.15 at that multiple, discounted back to today at a rate of 8%, gives us a value of ~$319.
As $319 is the median across the three methods, that is the price at which I'd consider revisiting SPGI. For now, it has leaped out of any bounds I'd consider.
Another Reason Against Investment
We should also address risks facing investment in SPGI. In particular, one risk stands out to me as a lover of excellent balance sheets: a heavy debt load.
Total debt stands at $4.55B meaning that SPGI has a debt-to-capital ratio that exceeds 1.0, and is much higher than the peers discussed above.
Before you rush off to check the cash coverage, it's not there. With $1.95B in cash, SPGI does not have the benefit of the cash-laden tech firms that I am generally covering. Should things turn sour in the business, or other unforeseen issues arise, this debt could prove to be quite an issue.
Another clear risk facing S&P Global is competition. While S&P is a household name today, opinions can change. Moody's could prove better accuracy and take significant market share. Even a startup could topple these giants if it can prove to be more apt at delivering accurate ratings.
Part of what drew me to S&P Global, and part of what drives all of my investment decisions, is the High-Quality Hideaway quantitative scores. No matter one's investment philosophy, High-Quality Hideaway has a score that will let a user screen for equities more efficiently.
Before coming to S&P Global, I was looking for 'A+' rated quality companies. These companies, generally, outperform the market. Sure, you have to get them at a decent price, but the high-quality nature ensures that you'll sleep safely at night with a portfolio that is less susceptible to market woes.
Here are the Hideaway Scores for S&P Global (as of June 1):
|Quality||Price||Short-Term Momentum||Long-Term Momentum||Composite|
Here are other quantitative data that are also provided by High-Quality Hideaway and can be used in investment decision making:
|Piotroski Score||Altman Z-Score||Ohlson O-Score||Analyst Grade|
S&P Global is a fantastic company. It is growing, and it operates in a sector that should continue to see growth for the foreseeable future. Unfortunately, the market recognizes that and SPGI trades at a premium because of it.
I have set up a price-target notification for myself of $300. If SPGI runs into macro turmoils again and the price goes tumbling, $300 is where I'd be looking to buy under. Until then, there are plenty more fish in the sea, so I'm going for another swim.
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This article was written by
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