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S&P Global (SPGI) Stock | NYSE: SPGI

Running the World's Capital Markets

S&P Global Inc. (“S&P Global” or “SPGI”) is a global credit rating agency (“CRA”) and provider of data and analytics solutions and benchmarks to capital and commodity markets around the world based in the United States. It is the largest CRA in the world and maintains the most important indices and benchmarks known to financial markets, including the S&P 500.

S&P Global is a company like no other – while it has a stable and growing core business in a “boring” industry (i.e., credit ratings), it has been growing its other segments – Market Intelligence, Platts, and Indices – just as fast, or faster, and expanding margins at rapid rates considering the size of the business.

Growth

28

Valuation

58

Quality

83
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Where Are We Now

Updated on: 11/15/2021

Conviction Score

9

A bond rating to a corporation or government is as important as a credit score to an individual – with a poor score or rating, obtaining financing can get difficult. S&P Global is one of two premier credit rating firms that will only become more important as companies and governments take on more debt in a low-interest rate world. The shares are not that expensive, either.

  • From today onwards, we expect S&P Global to grow along with the record amounts of new debt issuances that will also need periodic ratings after the initial rating.

  • Outside of the credit rating world, S&P Global has been riding other strong trends in capital markets – data, information, pricing, and stock indices (such as the S&P 500). All of these are strong sources of growth for the company.

  • The S&P Global and IHS Markit merger has been granted conditional Phase I approval by the European Commission. This is a great first step in this blockbuster deal and growth opportunity coming to fruition.

Investment Thesis

  1. S&P Global is the most interesting “boring” business in the world. It boasts a fixed-cost structure unlike any other to unleash the power of operating leverage as its core “boring” credit ratings business grows alongside faster-growing segments.

  2. SPGI penetrates capital markets from all angles – data, information, pricing, indices, and credit ratings. It owns mass amounts of data that it can use to expand product offerings and stay on top of new trends.

  3. The global credit boom, ESG (i.e., environmental, social, and governance) investing craze, and growing amounts of passive investing vehicles and assets under management (“AUM”) present astonishingly large markets in which SPGI can grow organically for years to come.

  4. SPGI has grown free cash flow (“FCF”) per diluted share at a compounded annual growth rate (“CAGR”) of 20% over the last decade. Its businesses are resilient, and its operating leverage is unmatched. Shareholders benefit tremendously.

The Basics

SPGI delivers data and analytics solutions, independent credit ratings, and benchmarks to capital and commodity markets around the globe. It is touted as the largest CRA in the world, slightly ahead of its major peer, Moody’s Corporation. Together, these companies control about 80% of the total global credit rating industry.

There are four major operating segments that constitute SPGI’s business:

  • S&P Global Ratings (“Ratings”)

  • S&P Global Market Intelligence (“Market Intelligence”)

  • S&P Global Platts (“Platts”)

  • S&P Dow Jones Indices (“Indices”)

Ratings

Ratings engages in just as the name implies – credit ratings. Additionally, Ratings creates and distributes research and analytics that investors and other market stakeholders use as information, benchmarks, and ratings.

The Ratings business targets five main market areas:

  • CRISIL (majority-owned Indian credit rating agency, CRISIL Ltd.)

  • Governments

  • Structured Finance

  • Financial Services

  • Corporates

Corporates make up most of this segment’s revenue while Financial Services makes up the next largest chunk. Governments is consistently the smallest portion of Ratings’ revenues.

S&P Global Ratings Revenue Split (Q3 2021)

Source: S&P Global Investor Relations

On occasion, Ratings generates revenue from acquisitions. However, it contributes little to the overall segment and as such, should be considered an auxiliary market opportunity for both Ratings and SPGI.

SPGI is not just a "volume" business — roughly half of revenues are generated from recurring, non-transaction sources. Non-transaction sources mainly include fees for surveillance (i.e., maintenance) of credit ratings and annual fees for customer relationship-based pricing programs.

From a geographical standpoint, most revenues are still originated from the US, but the international business is certainly sizable as well.

Despite a large portion of revenues being tied to transaction volumes, Ratings boasts very high historical operating margins around 60%.

The credit rating system SPGI uses is rather intuitive and somewhat mimics the school grading system. Long-term bond ratings vary from a D rating (worst) to a AAA rating (best). Short-term bond ratings vary from a “/” (i.e., in default) rating at the lowest end of the spectrum to A-1+ at the top.

For additional clarity, short-term bonds generally refer to those maturing within 365 days from the issuance date, in line with the major financial reporting standards (i.e., US GAAP, IFRS, etc.). Long-term debt would be debt that matures past the one-year mark.

Moody's Credit Rating SystemSource: jdlbusiness.wordpress.com

SPGI’s ratings business is one of the most important businesses in the world – it “connects” investors and other stakeholders with organizations and governments seeking debt to meet their financial priorities, investment opportunities, and growth capital needs. An “investment grade” rating from SPGI is arguably the most prestigious and recognizable rating a debt issuer can obtain (even more so than its peer, Moody’s).

SPGI’s credit ratings help investors gauge the level of risk they are taking on when they buy debt from a company or government. Although there is a negligible difference in credit quality and default rates between AAA-rated and AA-rated debt, there is a substantial difference between, say, AA-rated and BB-rated debt over the intermediate- and long-term time frames.

S&P Global Average Expected Default RatesSource: S&P Global at UBS Financial Services Conference Presentation

There are two important points that should be considered alongside the “Global Corporates Average Cumulative Default Rates” chart:

  1. Companies that investors would anecdotally refer to as high-quality companies with durable earnings and growth opportunities may have a poorer credit profile than some low margin, “boring” businesses. For example, Netflix is a BB+ company while Walmart is rated AA, even though Walmart’s 2020 net margin is under 3% while Netflix’s is above 11%.

  2. Investors should strongly consider these ratings when buying bonds. The purchase price of an investment should always factor in credit risk. Companies with high creditworthiness should have a lower interest rate attached to their debt, while financially compromised organizations should pay higher interest rates to compensate investors for the heightened risk of default over time.

SPGI’s ratings address both concerns above, giving investors clarity, insight, and an overview of a company’s ability to service debt now and in the future. By extension, this maintains order, integrity, and proper functioning of financial markets – organizations and governments, both good and bad, receive capital at the cost they deserve while protecting the large and small investors.

Once again, Ratings is one of the most important businesses in the world.

Market Intelligence

SPGI’s Market Intelligence segment seeks to serve investors and asset allocators by providing data, news, research, and other analytical solutions designed to give users an “edge” over other market participants.

Market Intelligence mainly targets investment professionals, government agencies, corporations, and universities. These solutions can be used in many ways, but they are typically used to pinpoint investment ideas, learn about industries and sectors, conduct valuation and peer analysis, and analyze credit risk.

To understand Market Intelligence better at a more granular level, it is important to see how the business is broken down further. Market Intelligence includes three main lines of business:

  • Desktop

  • Data Management Solutions (“DMS”)

  • Credit Risk Solutions (“CRS”)

S&P Global Market Intelligence Revenue Split (Q3 2021)

Source: S&P Global Investor Relations

Desktop is a suite of products that provides data, analytics, and direct research for professionals in finance to create investment strategies that allocate their own or clients’ money in a prudent and intelligent way.

The main product is Market Intelligence Desktop, which includes Capital IQ and SNL Desktop products. It is far more comprehensive and data-heavy than publicly available data sources like Yahoo Finance. If you have never heard of S&P, Market Intelligence Desktop is a competitor of the well-known Bloomberg Terminal.

S&P Global Capital IQSource: g2.com

Market Intelligence is out of reach for most retail investors, hence the focus on finance professionals, institutions, and governments. Pricing starts at around $13,000 per user per year, although pricing could drop to $7,500 per user per year for firms with many users. Market Intelligence captures about 6% market share while Bloomberg holds about 33% of the market.

DMS includes products such as Compustat, GICS, Point In Time Financials, and CUSIP. These are integrated programs that can be customized by tapping into and linking between over 200 datasets. As our financial markets grow more complex, data seemingly becomes more scarce. SPGI solves this concern by constantly expanding the DMS portfolio for clients.

CUSIP and GICS are particularly interesting aspects of the DMS portfolio. They are both industry standards that are used widely across the finance community and data platforms.

CUSIP stands for the “Committee on Uniform Securities Identification Procedures” and a CUSIP number is a unique nine-digit code assigned to North American securities (i.e., financial instruments such as stocks, bonds, etc.) to facilitate clearing and settlement of trades. In simpler terms, CUSIP is a common language shared among financial entities that allows trading floors, institutions, and global markets to function smoothly.

GICS refers to the “Global Industry Classification Standard”, the investment industry’s main methodology of splitting up groups of companies by sector, industry group, industry, and sub-industry. In partnership with MSCI, SPGI determined there are 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries that should capture virtually every business in the world. Each company is assigned one single GICS classification based on numeric and qualitative criteria according to its main business activity. Today, GICS classifies 47,000 active public companies across 120 countries.

Lastly, CRS provides deeper research that builds upon SPGI’s Ratings business to clients. Clients use solutions such as RatingsDirect, RatingsXpress, and Credit Analytics to access credit ratings, data, analytics, and research for exclusive and direct access to critical information needed to make decisions on trading credit and managing risk.

Market Intelligence is a high-quality business with high operating margins. This segment generates substantially all revenues through recurring, subscription-based sources. Most revenues were generated within the US, however, the segment's international reach is vast as well.

Platts

Platts is SPGI’s provider of information and benchmark prices for commodity and energy markets. These solutions grant insight into price data, analytics, and industry research. Combined, these insights facilitate the smooth and efficient functioning of global commodity and energy markets.

Platt’s revenue is generated from three main types of sources:

  • Subscription Sales

  • Sales Usage-Based Royalties

  • Non-Subscription Sales

Subscription revenues makes up almost all of total Platts revenues and are primarily generated from real-time news, market data, and price assessments subscriptions.

Usage-based royalties are generated from licensing fees related to market price data and price assessments to commodity exchanges.

Non-subscription sales make up a negligible portion of revenues related to conference sponsorships, consulting, and events.

This segment is heavily geared to petroleum markets and to a lesser extent, natural gas, power, and renewables. Unlike Ratings and Market Intelligence, Platts revenues are mainly generated outside the US. It is also extremely profitable – operating margins tend to float around the 50% mark.

S&P Global Platts Revenue Split (Q3 2021)

Source: S&P Global Investor Relations

Indices

S&P Dow Jones Indices is in the business of maintaining asset-linked indices to provide investors with benchmarks and tools to monitor stock and bonds markets and work with the finance community to create new financial products.

If S&P Global’s name looks familiar, that’s because it is – it constructs and runs the S&P 500 index as well as other major indices, like the Dow Jones Industrial Average (“DJIA”) and the S&P / TSX 60, Canada’s main stock index.

Specifically, Indices generates revenue from a variety of fee structures that relate to the following sources:

  • Investment Vehicles

  • Exchange-Traded Derivatives

  • Index-Related Licensing

  • Data and Customized Index Subscriptions

Investment Vehicles generates asset-linked fees from exchange traded funds (“ETF[s]”) and mutual funds that are based on SPGI’s indices, like the aforementioned S&P 500 or DJIA.

Exchange-Traded Derivatives derive revenues from sales usage-base royalties, which are based on trading volumes of derivative contracts. The more these derivatives are purchased by traders and investors, the more money SPGI makes.

Index-Related Licensing makes money based on fixed or variable annual and per-issue fee for a variety of products, namely certain types of derivatives and retail products.

Data and Customized Index Subscriptions refers to fees derived from index fund management, portfolio analytics, and research.

Asset-linked fees from the sources listed above generate the most revenue for the Indices segment. Exchange-Traded Derivatives make up a small portion of Indices revenues and Data and Customized Index Subscriptions do not contribute significantly more.

S&P Dow Jones Indices Revenue Split (Q3 2021)

Source: S&P Global Investor Relations

Financial Overview

It goes without saying that SPGI is a high-quality company. SPGI generates a substantial portion of its revenues from recurring sources with what appears to be never-ending demand. Most of SPGI's revenues are derived from such sources, which have at least some degree of a recurring component to them. These would include subscriptions, non-transactions, asset-linked fees, and sales usage-based royalties described in the previous few sections.

S&P Global Revenue by Source Type

Source: S&P Global Investor Relations

Revenue growth has been an unstoppable force over the past ten years, growing at a high single-digit CAGR year after year. Indices is the fastest-growing segment, expanding at a mid single-digit CAGR between 2011 and 2020. Ratings, Market Intelligence, and Platts all have been growing at steady high-single digit rates over the past decade.

S&P Global Historical Revenues ($M) (Q3 2021)

Not only does SPGI continue to grow its top line, but its margins are massive and grow at gravity-defying rates. SPGI grew operating income and net income at rates higher than revenues over the past decade.

When a company’s profits grow at rates faster than revenues, something magical happens – margins expand as well. Over the last few years, SPGI has witnessed substantial margin expansion both on the operating and bottom lines.

S&P Global Historical Profit Figures ($M) (Q3 2021)

History

S&P Global Inc., previously referred to by several names related to “McGraw Hill” prior to 2016, has history dating back to 1860. There are two separate lines of history that eventually merged to form S&P Global as it exists today: S&P Global Ratings and McGraw-Hill Companies.

S&P Global Ratings

Although Henry Varnum Poor has little to do with the succeeding formation of the McGraw-Hill companies, he started the S&P Global tycoon in 1860 when he published the History of the Railroads and Canals of the United States to help investors understand the emerging opportunities in the industry.

In 1868, Poor established his company, H.V and H.W Poor Co. with his son, Henry William Poor. Together, they published two guidebooks on an annual basis that reflected new info on railroads and their railway official directory.

Separately, Luther Lee Blake founded the Standard Statistics Bureau in 1906, which published small information cards that provided financial information on non-railroad companies.

By 1941, Blake and Poor’s companies merged to form Standard & Poor’s Corp.

McGraw-Hill Companies

James H. McGraw, one of the co-founders of McGraw Hill, purchased the American Journal of Railway Appliances in 1888 after he recognized the need for trade information related to the industry just as regulation began to drive competition. McGraw continued to write several more publications before he had established his own business, the McGraw Publishing Company, in 1899.

In 1902, the other co-founder of McGraw Hill, John A. Hill, published a few technical and trade publications that led to the formation of his own business, the Hill Publishing Company.

In 1909, the McGraw and Hill publishing companies joined forces to form the McGraw-Hill Book Company using only the book departments of their business. By 1917, the remaining parts of each business were combined under the McGraw-Hill umbrella to firm the McGraw-Hill Publishing Company.

By 1966, The McGraw Hill Companies took a leap of faith into the financial information services realm by acquiring Standard & Poor’s Corp, which was a credit rating agency by the time it was acquired.

Merged Company

The rest is basically history – S&P’s credit rating business was tucked under the McGraw-Hill company.

Along the way, S&P published CUSIP, the Standard & Poor’s Depository Receipt (SPDR) – today’s most-traded equity security in the world – was created and gave rise to the first form of passive investing, acquired CRISIL, and spun off the education arm of McGraw-Hill Companies.

By 2016, McGraw Hill Financial became S&P Global to pay homage to its evolution and focus on capital markets and form the company as we know it today.

Competitive Advantages

Good Luck Avoiding S&P Global

Debt issuers need S&P Global to rate their debt to bring it to market, sell it to investors, and obtain their sought-after capital. Budgeting, planning, and investing in operations and society is made easier with a highly recognizable SPGI credit rating.

Investors benchmark against the myriad of indices SPGI compiles and maintains, especially the S&P 500 and DJIA. These are the most important indices in the world which set the tone for risk markets everywhere else in the world.

Finance professionals turn to Market Intelligence to help them gain an edge over markets by accessing SPGI’s deep network of data sources, analysis, and research. It may not be the most popular service, but it sure is growing at rapid rates.

Financial institutions and clearing houses rely on CUSIP codes to verify, clear, and settle transactions in financial markets. Without a concept like CUSIP codes, North American financial markets today may have been decades behind in terms of efficiency, cost of operating, and overall functionality.

Perhaps what is most remarkable is the examples above are a non-exhaustive list of everything SPGI is capable of, not to mention what is still to come. They are also the source of incredibly high pricing power.

Everywhere you look in the world of finance and capital markets, SPGI has a product or solution to help individuals and institutions get money. Good luck trying to get around S&P Global if you live in a capitalist region.

Operating Leverage

As noted earlier, SPGI’s operating and net margins have been expanding at high rates over the past decade. However, the magnitude of SPGI’s operating leverage cannot be fully understood without looking at the specific pieces impacting operating income (except depreciation and amortization).

SPGI’s expenditures were around $2.9 billion in 2011. While revenues almost doubled, total expenditures increased at a much smaller pace to $3.7 billion in 2020, led by cost of revenues while other costs and expenditures remained roughly the same. SPGI was able to pull this off while maintaining its duopoly position, meaning it simply does not have to spend aggressively to protect its moat.

SPGI’s fixed-cost structure is best-in-class and is the source of its rapid margin expansion.

S&P Global's Expenditures Impacting Operating Income ($M) (Q3 2021)

If SPGI can maintain this cost structure while revenues grow at high-single digits or low-double digits, we would not be surprised if we see margins continue to increase for a long period of time. Virtually every marginal dollar of revenue generated would fall directly to operating income.

SPGI’s operating leverage stemming from its fixed-cost structure, productivity improvements, and process automation efforts form a powerful recipe for financial strength, growth, and ability to exercise optionality through reinvestments and business acquisitions.

The Ultimate Finance Data Package

SPGI serves a wide array of customers that use plenty of services, ranging from credit ratings to data management solutions, and finance data interfaces to commodity price data. The data SPGI collects is highly interconnected between its various product offerings and subscription solutions.

For example, SPGI’s data management solutions use over 200 datasets that are compiled from other aspects of SPGI’s business – GICS, credit ratings, Capital IQ estimates, indices, and others. Another example is SPGI’s subscription-based credit risk solutions which tap into SPGI’s enormous bank of credit ratings, analysis, and proprietary research and rating methodologies.

SPGI can use this proprietary data from its clients and customers to create new products and stay on top of new innovations and trends, such as ESG, passive investing, and many others. In other words, data is optionality.

Duopoly

SPGI competes in a highly consolidated industry with only three major players – MCO itself, SPGI, and Fitch. SPGI owns about 40% of the global credit ratings industry and has maintained a duopoly position for a long time.

SPGI’s unique competitive advantages led to its leading position in the credit ratings market. In turn, its leading position and reputable brand name also give it exclusive access to the biggest credit deals on the planet.

Many debt issuers seek credit ratings from at least two CRAs (mainly SPGI and MCO). Despite strong competition in this consolidated industry with Moody’s and Fitch, SPGI will usually be engaged by a debt issuer alongside either of its main competitors.

Global Bond Issuances

Global bond issuances have been rising at rapid rates since 2019, triggered by record-low interest rates, pervasive global fiscal and monetary financial easing and stimulus, and loads of cash sloshing around in financial markets.

In 2020, global bond issuances surpassed $27 trillion even though the entire world was battling the COVID-19 pandemic and the recessions that came with it. The trend between 2010 and 2018 was a flat one – global bond issuances fluctuated between a tight range of $17 trillion and $21 trillion.

Global Bond Issuances ($B)

Source: sifma.org

The increase in corporate bond issuances has a profound effect on the future of bond issuances. When a bond matures, companies and governments have two choices:

  1. Repay the debt

  2. Issue a new bond to repay the maturing one

The latter is the more popular choice today as aggregate corporate and government debt rises to greater magnitudes. Bond issuances are sticky – the more debt outstanding, the harder it becomes for the world in the aggregate to function without debt. It also becomes more difficult for central banks to tighten financial conditions, fundamentally changing the playing field.

Low rates for longer and accommodative financial conditions will give rise to several important behaviours from governments, especially when combined with growth in gross domestic product (“GDP”):

  • Companies will conduct more mergers and acquisitions (“M&A”) that can be funded with cheap debt.

  • Organizations and governments may borrow more to invest more in their business or jurisdictions, respectively, to match their peers.

  • Organizations and governments may borrow larger amounts and for longer to lock in record-low interest rates.

Unless a massive global debt jubilee occurs, we believe this pervasive hunger for debt will continue for many years.

The data supports our view - the pipeline for global corporate bond maturities is rather high, and the global debt-to-GDP ratio continues to creep up.

S&P Global Corporate Bond Maturities OutlookSource: S&P Global Investor Relations
Global Debt and Global GDPSources: Axios Visuals, The Institute of International Finance

We believe SPGI is best positioned as a CRA to directly benefit from this credit boom. Its brand name, highly recognizable and prestigious credit rating system and stamp of approval, duopoly position, and remarkable operating leverage should allow SPGI to grow at rapid rates throughout the 2020s.

The Passive Investing Boom

Unlike its largest competitor, Moody’s, SPGI has operations related to various equity and fixed-income market indices. As a large operator and leader in this space, SPGI is set to benefit from an incredibly large and growing trend: passive investing.

Passive Assets Under ManagementSources: Financial Times, Investment Company Institute, Morningstar Direct, Strategic Insight Simfund

AUM for passive index fund and ETF investing have grown from a round zero in 1990 to over $15 trillion in 2020. As the world is deprived of investment yields in “safe” assets like bonds, investors are increasingly turning to equity markets and other alternative public market funds based on certain indices to fill up their portfolios. Additionally, the average global investor is warming up to the idea of passive investing as equity markets have performed well for several decades.

To be clear, we are not endorsing any specific style of investing in this writing. We would only like to point out that total AUM under passive strategies is increasing at rapid rates and does not appear likely to slow down any time soon.

SPGI is a prime beneficiary of this trend as the global leader in providing indices for the ETF market space. SPGI’s Indices segment has been its fastest-growing segment, and it looks like it will continue to grow at above-average SPGI segment growth rates.

Optionality from Financial Strength

SPGI has a strong balance sheet and income profile, and it's not afraid to use it.

In November 2020, SPGI announced a massive merger proposal to join forces with IHS Markit (“IHSM”), a British business, finance, and government information provider, as part of a $44 billion all-stock deal to acquire almost 68% of the business. SPGI sees IHSM as a highly complementary company that operates in attractive markets and has “cutting-edge innovation and technology capability” to quicken growth and value creation for SPGI and IHSM shareholders.

Provided all regulatory approvals are granted, SPGI will be able to leverage IHSM’s assets to expand on its Market Intelligence offerings. Additionally, SPGI and IHSM will strengthen their data, platforms, ESG benchmarks and analytics, and climate and energy transition.

Thus far, SPGI and IHSM have been granted conditional Phase I approval from the European Commission for the blockbuster merger. The companies are not yet cleared to merge, but this is a necessary first step in the two ultimately coming together.

SPGI is open to deals, large or small, to be able to tackle new verticals, improve its value propositions, and expand its product offerings.

SPGI is also laser-focused on the demand for ESG products. Its strength in benchmarking, indices, and analytics enables it to target new verticals at a rather rapid pace, much faster than peers in the financial markets space. ESG is a nascent industry that is attracting money inflows in the billions.

SPGI is launching new products in the space to meet high demand. ESG products in particular are experiencing stratospheric growth rates from which SPGI benefits. Additionally, SPGI is investing in ESG across all segments, an idea that is also one of the strongest trends in recent years and years to come.

SPGI ESG Efforts in CategoriesSource: S&P Global Investor Relations

Its core businesses are so strong and have so much operating leverage, it would be foolish for SPGI to not attempt to try new things. We are encouraged by management’s efforts to perform acquisitions of complementary assets and lead ESG.

Capital Allocation

SPGI’s market capitalization ("market cap") at the beginning of the 2016 calendar year was about $20 billion. Do you wonder what happened over the next five years? SPGI returned about $8.7 billion of capital to shareholders via dividends and share repurchases between 2016 and 2020.

If an investor purchased SPGI stock in January 2016, they would have received almost 45% of that market cap in the form of capital returns excluding net income growth or multiple expansion by the end of 2020. This alone defines what SPGI's capital allocation strategy is all about - focus on cash flow and return capital.

Between 2011 and 2020, almost all allocated capital went toward dividends and share repurchases (the exception is in 2015 when SPGI acquired SNL Financial). Only a small amount of capital is dedicated towards capital expenditures and business acquisitions. As mentioned earlier, SPGI simply does not need to fund its operations aggressively to maintain its moat (at least at this point in time).

S&P Global Allocated Capital ($M) (Q3 2021)

Shareholders may be concerned with the heavy allocation towards capital returns rather than major reinvestments in the business. But, as we explored earlier in this report, SPGI has massive operating leverage and continues to grow at high rates. Investors should keep track of FCF per diluted share to gauge and assess SPGI’s capital allocation policies. The track record is astonishing – FCF per diluted share has expanded drastically over the past ten years.

S&P Global Historical FCF per Diluted Share ($) (Q3 2021)

We believe SPGI’s duopoly position, high degree of operating leverage, and long growth runway in all things capital markets will allow the company to continue growing FCF per diluted share at impressively high rates.

Risks

Cyclical Revenues

Approximately 30% of SPGI’s revenues are derived from transactional sources (i.e., volumes as opposed to contractual recurring revenue). Debt issuances are highly sensitive to fluctuations in the broader economy and other geopolitical events. In the case of adverse economic events, debt issuance could drop off substantially, harming the transaction portion of SPGI’s revenue mix to a great extent.

Stimulus – What if it Ends?

Financial markets have been flooded with tons of cheap money over the last 1-2 years. If central banks taper their monetary stimulus efforts or if governments hold back on fiscal spending to bring down their debt amounts as a percentage of GDP, this may negatively impact the number and size of M&A deals and reduce organizational appetite for debt as interest rates rise.

Regulatory Oversight

SPGI is watched closely by regulators for their role in the stability of financial markets and as a member of a highly consolidated industry.

In 2014, SPGI reached a $1.6 billion settlement with the US government, 19 states, and the California Public Employees’ Retirement System over its ratings on mortgage securities that ultimately led to the housing collapse in the 2008 financial crisis. SPGI will be watched closely by governments around the world and may be the scapegoats of future financial collapses. This could sour investor sentiment towards SPGI.

Additionally, SPGI is a large market player and will face antitrust concerns when acquiring companies. Currently, SPGI’s proposed merger of IHSM could fall to shambles if regulators believe competition will be hurt. Even if some jurisdictions approve the merger, others may not. This could harm the growth potential of SPGI as it grows larger and organic growth opportunities shrink.

Acquisition and Integration Risks

SPGI may not be able to integrate all targets according to plan, which could hurt M&A deals and the expected accretion to SPGI. Also, the lack of acquisition targets could hurt SPGI’s ability to grow inorganically.

Bottom Line

SPGI is a high-quality company with a large moat as it penetrates capital markets around the world from every angle. Its credit ratings business is the world’s best, its indices are the world’s most popular, and it stays on top of every major trend in financial markets – debt issuances, ESG, and passive investing.

The company is flush with optionality as it leverages its own data and powerful operating leverage to invest in the future. Its core business should also continue to perform well as SPGI taps into its brand reputation and duopoly position to further widen its moat in credit ratings and other data and analytics solutions.

The company has no shortage of growth opportunities. We believe SPGI will grow for years to come as debt markets, passive investing, ESG, and the hunger for financial market data expand.

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