Steady compounding credit rating business with one of the strongest moats in existence

S&P Global Inc. SPGI 0.00%↑

The business

S&P Global is a financial info and analytics company that provides intel to businesses, governments, and people globally.

SPGI has four core divisions: S&P Global Ratings, S&P Global Market Intelligence, S&P Dow Jones Indices, and S&P Global Platts. These work together to give clients insights, data, and analytics. The company has a history that dates to 1860 and operates in more than 30 countries. S&P Global has recently focused on using tech like AI and ML to improve its offerings. Overall, it is a reputable brand and is likely to stay a top player in the market.

After the 2007-2008 Global Financial Crisis S&P Global separated itself from the underwriting process. This means that they are no longer a part of the debt prospectus and the risk of something similar happening again is unlikely.

The Fundamentals

Operations

• ROIC 5-year average: 41.59%

• Gross Margin: 66%

• Operating Margin: 27%

• Cash Conversion: 77%

Valuation

• Forward PE: 27.5

• FCF Yield: 2.1%

• PEG: 2.35

5-Year Growht rates (pa.):

• Revenue: 13%

• Net Income: 16.8%

• EPS: 12%

High-quality operational metrics and fundamentals, decent growth, steep price. Does the business quality justify it? Let’s find out.

The Stock

SPGI has outperformed the S&P500 by a wide margin over the last decade, this outperformance is likely to continue, if one does not overpay.

The Market and competitive advantage

More than 90% of the world's debt has ratings from the duopoly S&P Global and Moody's. The trust in the financial systems of a business like S&P Global creates an environment with high barriers to entry. Even if a newcomer had endless resources, the reputation, trust, and structural advantage of S&P Global is so strong that customers would still prefer it over the newcomer.

The sustainable competitive advantage of S&P Global is the regulations that have solidified the duopoly in the rating agency business. The companies that choose a competitor of S&P Global will end up paying higher interest on their debt. Usually, the markup is 30-50 basis points higher. Competitors could offer to rate the customer’s debt for free, and it would still make economic sense for the companies to choose S&P Global or Moody's. Considering this, S&P Globals moat is wide.

SPGI completed a $44 billion acquisition of IHS Markit in 2022. The acquisition should strengthen SPGI’s revenue stream with IHS’s recurring revenue model.

Valuation of S&P Global inc.

In a simple discounted cash flow analysis I have set 3 scenarios for growth in FCF: - 10% - 15% - 12% Discount rate: 10% This provides a weighted price of $140BN The current valuation is $114BN. The DCFA suggests a 23% discount.

Given the normal scenario of 12% cash flow growth, we can expect a 12,3% annual return on S&P Global from current levels. This estimate does not leave a big margin of safety, but the business quality and moat of SPGI might make up for it.

Conclusion

S&P Global has been on my watchlist for a while. I am waiting for the expected 15% pa. growth rate before I initiate a position. I'm being patient with this one, as I will probably own it for a very long time. If $SPGI hits my price of ~$100BN market cap, I will consider taking a decent-sized position in the business.

A 15 % annual return given the growth rates and multiple after 10 years shown above, would require a price of $98BN.