S&P Global Inc.

Moat: 4/5

Understandability: 3/5

Balance Sheet Health: 4/5

S&P Global is a leading provider of credit ratings, benchmarks, analytics, and workflow solutions in the global capital, commodity, and automotive markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

S&P Global operates through six distinct segments: Market Intelligence, Ratings, Commodity Insights, Mobility, Indices, and Engineering Solutions. Each plays a crucial role in the global financial and commodity landscape.

Business Overview

  • Market Intelligence: This segment provides multi-asset-class data, research, and analytics. It serves professionals working in financial markets, corporate finance, and private equity.
  • Ratings: As one of the three major rating agencies, S&P’s global ratings segment offers credit ratings and associated insights, playing a critical role in informing capital markets about credit risk, primarily through fixed income debt ratings, such as corporate credit, and debt issuance ratings.
  • Commodity Insights: This segment provides price assessments, news, analytics, and insights into the global commodity markets. It provides market data for a variety of commodity categories, including: petroleum, gas, coal, chemicals, agriculture and metals.
  • Mobility: This division offers automotive-related data, insights, and solutions. These services range from providing information for auto manufacturers, suppliers, and other companies in the automotive space. It has insights regarding car specifications, VIN look ups, and auto parts.
  • Indices: S&P Global’s index business provides market indexes, benchmarks, analytics, data, and research. The company is a leading provider of market benchmarks, and its indices form the basis of investment portfolios worth trillions of dollars.
  • Engineering Solutions: This segment provides engineering intelligence software to customers within the automotive, infrastructure and medical devices markets. It has content, data, workflows, and design capabilities needed to develop and enhance their products.

S&P Global’s services are heavily used by financial professionals as they are recognized as a top provider of credit ratings, data, indices and analytics, creating a network effect.

  • Consolidation: The market is seeing consolidations, with larger companies seeking to diversify their offerings and gain a broader market presence. For example, as a result of the recent merger of S&P and IHS Markit, the market might become even more concentrated.
  • Technological Advancements: AI, big data, blockchain, and other new technologies are reshaping financial data and analytics tools. New data sources, faster data processing, automation, and increased digital access are quickly being incorporated.
  • Increasing Demand for ESG Data: Environmental, Social, and Governance factors are becoming more important to investors, creating demand for better data and tools relating to these factors. Sustainability is a growing part of investing, with more investors looking for ESG-based insights when investing.
  • Competition: While S&P Global holds a strong position, especially in credit ratings, it faces competition from the other two global credit rating giants, Moody’s and Fitch, along with smaller regional players. Also, it competes with technology companies offering data analytics and investment research. It must also stay ahead on technological development in order to stay competitive.

The company must carefully monitor these risks and opportunities, in order to keep their moat intact.

Moat Analysis

S&P Global’s primary source of competitive advantage stems from an economic moat based on intangible assets and switching costs. The company’s moat is relatively wide (4/5).

  • Intangible Assets: The strength of SPGI comes from its well-known brands in credit ratings (S&P Ratings), indices (S&P Dow Jones Indices), and financial data (S&P Market Intelligence). These recognizable brands have an established reputation with clients and users, attracting more customers due to the reliability and prestige associated with them.
  • Switching Costs: Many of SPGI’s services feature high switching costs, because their products are highly integrated into the customers’ workflows and operations. Switching to new providers means potential data losses and retraining, so they must have significant benefits to switch to their competitors. For instance, if a fund manager is using S&P’s data for a long time, migrating to data provided by a competitor requires substantial time and effort.
  • Network Effects: While not as pervasive as in technology companies, SPGI benefits from network effects within a small community of financial professionals who value consistent and widely followed data and benchmarks. The more people there are that recognize a data, rating, or benchmark, the more valuable it is to its users, and thereby makes it more difficult for competitors to break in.

Financials Overview

S&P Global has a strong track record of revenue and earnings growth, and it’s consistent return on capital is also commendable.

  • Revenue Distribution: Subscription-based revenues make up a large part of SPGI’s revenues, particularly in data and index subscriptions, while transaction-based revenues fluctuate according to market activity. International revenues are also a large part of revenue, with roughly half from the U.S. and half from international, with Europe and Asia making the most of it.
  • Margins: The company has high operating margins, which averaged around 40% in the last couple of years. This profitability shows how strong the moat is and the pricing power the company has over its clients. This is expected to increase due to efficiency and cost synergy after the merger with IHS Markit.
  • Profitability: As shown in Exhibit 5 (ROIC minus WACC), the company’s return on invested capital is significantly above its weighted average cost of capital, showing its profitability is higher than its cost of capital, so the company is creating value.

SPGI’s high-profitability and revenue distribution across different markets and streams makes for consistent financial performance.

Recent Concerns/Controversies

  • Macroeconomic Headwinds: As per management reports, market volatility, supply chain issues and the Ukraine War have impacted their business and operating results. Inflation may also lead to higher labor costs, which can lower operating profits.
  • Merger Integration: As a result of the merger with IHS Markit, they are still integrating both businesses which may cause operational issues during this time period, in the short and mid-term.
  • Regulation: The risk of regulatory issues increases, particularly after merging with IHS. The new company may need to go through new regulatory approvals, especially those pertaining to financial reporting standards.
  • Cybersecurity: As the company becomes more technological, so does the risk of cybersecurity threats. Management expects that having proper cybersecurity will be crucial for the continued operations of the company in the future, and are investing heavily in these measures.

Balance Sheet Health

S&P Global’s balance sheet is generally in good health, but has some aspects that could use some improvement (4/5).

  • Debt: The company has high amount of debt related to the merger between S&P Global and IHS Markit. A significant portion of this debt is long-term debt, which gives some stability. However, as interest rates are rising, so will the cost of the debt, so the company must focus on repaying some of the debt.
  • Cash Flow: The company has historically demonstrated strong free cash flows, which have been used for the aforementioned debt repayment and share buybacks. Because these cash flows are strong, they reduce the risk associated with holding larger debt.
  • Investments: SPGI has a significant portion of its assets that are labeled as “marketable securities”. These are primarily cash and investments that can be used to support the business or acquisitions.
  • Net Worth: The net value of company is in good state, with its liabilities being relatively manageable.

Although SPGI is strong in some financial areas, it must deal with its debt and be prudent in managing it.

Understandability Rating

Based on the analysis, S&P Global’s business can be rated 3 out of 5, because it requires some study to fully understand.

  • Not as Straightforward as It Seems: The operations of SPGI are not as easy to understand as, say, a simple restaurant. You need to have a solid understanding of data analytics, ratings agencies, financial markets, and various types of regulations in order to fully understand what this company does.
  • Business Segments: It is also important to comprehend what each division of SPGI does in order to have a good understanding of its revenue streams and overall business structure.
  • Accounting Complexities: While the basic principles of accounting at SPGI are easy to follow, like any firm, it uses complicated accounting terminology, and thus needs some research to see the impact of those items on financial statements.

Though not as simple as a pure service or retail business, SPGI isn’t the most complex business to analyze.

In conclusion, S&P Global is a good, high-quality, profitable business with a wide moat, especially in ratings and indices, but has some risks and issues pertaining to its recent merger. It is a well-run business that is worthy of further investigation.