S&P Global Inc.’s (NYSE:SPGI) second-quarter earnings report settled on Tuesday, concurrently raising interest from investors as the company strolled past estimates, achieving a revenue beat of $140 million and earnings per share best of 39 cents.
Despite S&P Global’s second-quarter earnings triumph, question marks remain about its stock’s prospects, given potential repositioning in the financial markets and S&P Global’s stock’s valuation outlook.
I delved into S&P Global’s key talking points to address the juxtaposition; here are my thoughts.
The Firm’s Optics
Many of us are familiar with S&P Global’s credit ratings and indexing revenue streams. However, the firm has recently gained more depth than most believe, as it has tapped into new business opportunities, including market intelligence, mobility, and commodity insights. As such, S&P Global can be thought of as an integrated business with numerous renewed growth aspects.
S&P Global’s Revenue Streams (S&P Global)
Herewith is a breakdown of S&P Global’s key revenue streams.
- Indices: S&P provides a range of indexing solutions to market participants. The most notable is probably its S&P 500 index, which is a market capitalization-weighted index of the 500 largest companies in the United States.
- Mobility: The company’s mobility segment focuses on the automotive industry and provides automotive data to various end markets.
- Commodity Insights: Provides commodity benchmarks and related insights.
- Ratings: Rates issuers’ debt offerings to enhance their transparency and marketability.
- Market Intelligence: An analytics and research outlet for market participants, including retail investors, financial institutions, and governments.
Let’s traverse into a discussion about S&P Global’s second-quarter earnings report.
Second-Quarter Earnings Beat
As previously mentioned, S&P Global beat its second-quarter earnings estimate. However, I failed to mention that the firm’s quarterly revenue increased by 14% year over year, reaching $3.549 billion. Moreover, S&P Global’s adjusted operating profit margin edged up to 50.7% from 46.2% a year earlier, illustrating the company’s inflation pass-through capabilities.
Given its earnings beat, S&P Global decided to raise its full-year guidance. The company anticipates its full-year revenue to grow by 8% to 10% and its adjusted earnings per share to settle between $14.35 and $14.60. Moreover, S&P Global committed to an “accelerated” share repurchase program, in which it will likely execute $1.5 billion in share repurchases in the next weeks.
Outlook (S&P Global)
S&P Global’s earnings beat forms part of a series. Although a simple observation, earnings momentum often translates into stock momentum, and therefore, I outline the firm’s earnings momentum as a key value driver.
NB: Q2 Not Included (Seeking Alpha)
Where To From Here?
Ratings & Indexing
S&P Global’s ratings revenue increased by 33% in Q2. I see additional support for this segment in the next few quarters as lower implied interest rates (yield curve) will likely cause issuer refinancing via call options or new debt listings, contemporaneously raising the demand for credit rating services.
Furthermore, a lower yield curve might spark a rise in credit spreads, alerting the credit outlook on for borderline investment-grade bonds. As such, re-ratings might occur.
A final factor worth mentioning about S&P Global’s ratings business is its operating profit margin. The segment spans about 32% of the company’s revenue and has an operating profit margin of 65.8%, suggesting it could ignite a firm-wide margin expansion story.
Ratings Segment Revenue (S&P Global)
Another exciting Q2 event is S&P Global’s indexing business, which gained 12% and achieved a 70.7% operating profit margin. The business is a staple of S&P Global and, therefore, always indicative of firm-wide health. Moreover, I see additional growth factors involved, namely the emergence of private market indexing and the ongoing momentum in thematic indexing.
In essence, I believe we’ll see sustained growth, especially given S&P Global’s dominant market position.
Indexing (S&P Global)
Market Intelligence
I must admit that I’m quite surprised about S&P Global’s market intelligence unit, which achieved merely 7% in year-over-year revenue growth. Market data is a game-changer in today’s data-driven world, especially considering the rising demand for private market data.
The segment’s lower-than-firm-wide operating profit margin doesn’t surprise me, as the segment remains in its formative stage. However, it seems like fierce competition is posing problems as many firms are fighting for a position in the market.
Market Intelligence (S&P Global)
Other
Other key areas for S&P Global are its mobility and commodity insights businesses. Collectively, the segments amount to about 25% of the firm’s revenue. However, synergies might come into play as traction from the auto industry and real commodity participants can result in cross-sale possibilities. Additionally, a transformative period in the auto sector, namely EV uptake, presents telling opportunities for S&P Global’s mobility unit.
Segmental Growth Forecasts (S&P Global)
Valuation and Dividends
Multiples
As previously mentioned, S&P Global expects its adjusted diluted EPS to settle between $14.35 and $14.60 for 2024.
By using an intraday stock price, the firm’s best-scenario forward P/E is around 33.25x, which, in isolation, seems high. However, consider that S&P Global is a growth stock, meaning a higher P/E is likely acceptable.
Growth Rates (Seeking Alpha)
To accommodate an isolated view of the stock’s P/E, I used an absolute valuation technique: I multiplied its five-year average P/E by its December EPS forecast. This methodology is called the P/E expansion formula, and although simple, it provides solid guideposts.
The following diagram provides a time series of price targets. Note that they are merely guidelines and not certain price targets.
Year | 5-y Avg FWD P/E | EPS | Price Target (rounded) |
Dec 2024 | 34.92x | $14.33 | $500 |
Dec 2025 | 34.92x | $16.15 | $564 |
Dec 2026 | 34.92x | $18.16 | $634 |
Source: Seeking Alpha
S&P Global’s stock traded around the $485 handle on July 30th. Therefore, I conclude that the stock is undervalued on this basis alone. Other valuation metrics must be considered to formulate a holistic analysis. However, I deem this metric a prudent baseline as it includes earnings growth and normalizes the stock’s cyclical effect on P/E.
Buybacks and Dividends
In my view, S&P Global is far from being a dividend opportunity. The company’s latest dividend data has yet to be added to the data mix below. However, a five-year yield on cost of 1.49% summarizes my argument. Nevertheless, as mentioned before, the company has committed to a near-term stock buyback of $1.5 billion, which, I think, will drop the stock’s cost basis, leading to a favorable result for investors.
Doesn’t include new dividend declaration data (Seeking Alpha)
Risks
Despite being positive about S&P Global’s prospects, lingering risks exist. For example, I think a potential interest rate pivot might reduce the number of CLO issuances, ultimately leading to lower revenue from a highly lucrative domain. Additionally, higher unemployment rates and inconsistent consumer confidence raise economic risk: will an economic crisis occur and wreck the overall supply of listings? Only time will tell.
Another consideration is S&P Global’s quantitative risk metrics. For instance, I consider the stock’s Value-at-Risk Ratio elevated and, therefore, outline tail risk as a noteworthy factor. Moreover, the stock’s share ratio is below the SPY ETF’s (SPY), suggesting its risk-return profile might be less-than-optimal.
Aside: Here are links explaining the VaR and SR Ratios.
Seeking Alpha; YCharts
Conclusion
After assessing S&P Global’s latest earnings report, I identified potential margin expansion drivers, such as strength within the firm’s indexing business and ratings unit. Moreover, I’m optimistic about long-term prospects like private market data aggregation and synergies from the company’s mobility unit.
Considering its elevated P/E ratio, some might consider S&P Global’s stock overvalued. However, I believe an absolute valuation communicates solid value.
Consensus: Bullish/”Buy” Rating.
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