S&P Global Inc. (NYSE:SPGI) reported adjusted EPS of $2.81 yesterday and guided for the entire year of 2022 of $11.35 to $11.55. These fell short of the $2.93 and $12.22 estimates, respectively. The S&P 500 index and bond credit ratings are S&P Global’s two most well-known accomplishments. A slowdown in corporate debt issuance, for which SPGI is well-paid to provide ratings, was the leading cause of the shortfall.
According to management and analysts, five of SPGI’s six segments showed growth, who also mentioned this on the earnings conference call. They anticipate the slowdown to alleviate over time. Although SPGI stock has underperformed the market this year, it has outperformed since 2000, even after the company’s guest appearance as a villain in the Global Financial Crisis.
S&P Global’s Strategy
For the year, earnings and the stock price are declining, but the company has performed remarkably well. So what is the strategy?
Acquirements. S&P Global purchased IHS Markit (INFO) in February for $44 billion shares, and the businesses are currently being integrated. IHS Markit offers business intelligence, such as import/export statistics, inventory data, macroeconomic data, etc., to assist businesses in conducting business.
They are most known for being the owners of Carfax, the notorious used automobile data company. It will take some time to integrate a $44 billion acquisition, but management thinks it will be crucial to increasing earnings. Over the long term, SPGI has been able to beat the market since it has always been a reasonably acquisitive corporation.
Buybacks As of right now, SPGI is repurchasing a sizable amount of stock or about 10% of the total number of shares outstanding. They recently made this faster. This, in my opinion, indicates that they are confident in how they are running their firm and that the market is undervaluing their achievements in terms of long-term success.
It will be fascinating to see how this plays out because, during the last ten years, S&P Global has issued more shares than it has acquired. For buybacks to be highly effective, the stock needs to be pretty costly (they just issued a bunch of stock for acquisition, too, so this is canceling out). Instead, I would prefer to see a dividend.
Cost reductions. Looking at its income statements, S&P Global has shown an excellent ability to raise revenue over the previous ten years while keeping operational costs under control. This is most likely the future strategy as well. I predict the business will keep rolling up smaller rivals and making numerous acquisitions. If done correctly, this will encourage a further increase in earnings per share.
Risks and Value of SPGI Stock
SPGI trades for roughly 26x 2023 earnings and 31x 2022 earnings, respectively. This is far higher than the market and what SPGI has previously traded.
Although a 26x multiple for a rapidly expanding company doesn’t particularly worry me, this seems excessive given how much SPGI appears to have gained from the COVID boom and the fact that we already know that EPS is down from last year. I prefer to see a smoother profits growth curve rather than stops and starts if I’m prepared to pay 25–30 times earnings for a company.
Several dangers instantly sprang to mind:
- Profits soared after COVID sparked a boom in the issuing of junk-rated loans. Unanswered is the question of whether these profits can be sustained if the Fed is compelled to stop the credit party to combat inflation.
- Although SPGI has had secular growth, the company is not immune to the business cycle.
- Considering SPGI’s record with acquisitions, I don’t worry as much about this. Still, EPS will be diluted if they make a significant purchase and the integration fails. This is always a possibility, especially given the propensity of top M&A executives to leave their positions or be lured away by other businesses.
To Sum Up
S&P Global has a solid track record over the long run, and the good exceeds the bad. However, you are paying 31x earnings for yearly declining earnings as a stock. There is no assurance that the credit market will generally function in 2023. Debt issuance would decrease much more if the Fed has to raise rates more than anticipated or the economy experiences a recession.
There is an excessive reliance on future growth, which leaves this company vulnerable to a decline of 30% to 40% if growth stops. With the potential to be a buy at a cheaper price, I’ll rate SPGI as a hold at this point.
Featured Image: Megapixl © Alexandersikov
