S&P Global: Everything Investors Didn’t (And Shouldn’t) Like In The Report (NYSE:SPGI)

S&P Global (NYSE:SPGI), a leading financial information services company and a cornerstone in many long-term portfolios, has let down investors in its recent Q4 earnings.

Admittedly, I too was wrong in my estimates coming into the print, although I think management played a big role in setting the bar too high, as we’ll discuss in detail.

So, following the disappointing results, let’s go over everything investors didn’t and shouldn’t like in SPGI’s report, and gauge what it means for the near and long-term.

Introduction To S&P Global

I’ve been covering S&P Global on Seeking Alpha since April of last year. Initially, I rated the company a Strong Buy, as I thought the market severely mispriced the company due to post-acquisition complexities. I then lowered the rating to a Buy, claiming the company is still attractively valued considering its long-term prospects.

In short, S&P Global is a diversified financial information services company, which generates revenue from three types of offerings.

First, there’s software data & analytics solutions, under the Market Intelligence, Commodity Insights, and Mobility segments. There are hundreds of different products and services under each of these segments, but they are all similar in that they support financial decisions in a certain area of expertise.

Second, there’s the Indices segment, under which the company builds proprietary indexes, like the famous S&P 500. Asset managers pay fixed and asset-based fees to use those indexes, for purposes such as benchmarking and providing ETF and ETF-like products.

Lastly, there’s the Ratings segment, which employs thousands of analysts directly and through local partnerships all over the world. Using S&P Global’s proprietary credit rating methodology, these analysts rate credit worthiness for a wide variety of purposes, including bonds, private debt, M&A, and more.

As I wrote in previous articles, S&P Global is uniquely positioned to grow in excess of worldwide GDP, as it capitalizes on global wealth accumulation and digitalization.

With that said, the company came short of expectations last quarter, and that’s why we’re here. Let’s dive in.

Management Didn’t Manage Expectations

S&P Global came into the fourth-quarter print with high expectations. Investors, myself including, were expecting a triple-beat, meaning a beat on revenue, EPS, and guidance.

Instead, we got a double miss on EPS and guidance, as EPS came in shy by $0.01, and guidance for next year came in lower than expected, for both the top and bottom line.

Generally, I wouldn’t regard a $0.01 as a miss to worry about, but if you’ve been following the company’s conferences during the quarter, they repeatedly affirmed their guidance and sounded highly confident.

In their December Goldman Sachs conference, which took place less than a month before the calendar quarter ended, they delved into each line item of their projections, and still maintained their guidance. So I think it’s a more disappointing miss than a regular one.

Continuing on a similar front, management came out with a revenue growth guidance of 5.5%-7.5%, and it seemed they didn’t make enough effort to explain the message that their organic expectations are actually 7%-9%, with the engineering segment divestiture weighing on the top line comparison.

Lastly, they increased the dividend by a very underwhelming 1%, and investors awaited an announcement on more aggressive debt repayments or increased share repurchases, expecting this to be the reason for the very low dividend raise.

Considering the general type of investor that invests in S&P Global, I think that the combination of all those small missteps drove a small downgrade.

Enough public relations, let’s dig into fundamentals.

No Sharp Recovery In Ratings

Debt issuance experienced a sharp decline in 2022 amid macro concerns and rising interest rates. S&P Global’s Ratings business was no exception, seeing revenues plummet by 25%. In 2023, investors expected a moderate recovery, which did occur, as revenues grew by 9%.

Investors expected the growth acceleration theme to continue well into 2024. Instead, based on the mid-point of management’s guidance, revenue growth is expected to decelerate to 7%.

Consequently, both margins and revenues are expected to remain well below 2021 levels.

While I’m confident in S&P Global’s ability to gain back and even surpass 2021 numbers, the timing is now longer than what I initially thought.

Growth Deceleration In Indices

Index revenues grew by 4.6% in Q4, a deceleration from 5.6% in the third quarter. Margins declined by 360 bps, primarily due to mix, as investors reallocate funds to cheaper products like the S&P 500, rather than more complex derivatives, and as revenues lag AUM growth.

This trend resulted in AUM growing faster than revenues (average AUM grew 8% Y/Y compared to revenues growing 3.5%). Those simpler types of assets tend to more sticky and with a longer time horizon, so it’s not too bad for the long-term. However, it is hurting near-term results.

Unlike the Ratings business, the guidance in Indices was good, with management expecting growth to accelerate to 8%, and margins expected to improve slightly. This is supported by the fact that ending AUM was significantly higher than average AUM, similar to what we saw in 2020-2021.

Weakness In Market Intelligence, But This Time It’s Different

In the introduction section, I put Market Intelligence, Commodity Insights, and Mobility, under the same information services umbrella. Double clicking into each of these segments, it’s clear which of them have significant differentiation, and which are participating in more competitive landscapes.

The Market Intelligence segment generates margins in the 30% range, whereas Commodity Insights is in the high-40% and Mobility is around 40%. That pretty much tells the whole story.

While Mobility and Commodity are expected to maintain their high-single-digit growth levels, Market Intelligence is facing challenges of increasing competition and softening demand, resulting in an underwhelming outlook for 2024.

Valuation

With no growth acceleration and no significant margin expansion expected in 2024, investors will have to make do with another step towards normalization. Normalization means 7%-9% organic growth, and gradual margin expansion.

And if normalization is the story, rather than sharp recovery and growth acceleration, it’s only reasonable to expect the stock will trade in the lower end of its historical 30x-33x P/E range.

What do you know, that is indeed where it went to following the report.

So, with a long-term lens, the investment thesis in S&P Global remains intact. It is a phenomenal, crucial company, which will provide GDP-plus top line growth for the foreseeable future, drive steady operational lever along with it, and maintain disciplined capital allocation. That is a recipe for market-beating returns, and that is why S&P Global remains an attractive investment even when fairly valued.

With a near-term lens, I believe the selloff was justified, and S&P Global will have to drive meaningful upside over expectations to fuel an upswing. Such upside is unlikely amid resurfacing macro uncertainty. Unless management intentionally set expectations low, I don’t see what could drive a major beat in the upcoming first quarter results.

Conclusion

Investors were rightfully disappointed in S&P Global’s results, which signaled no sharp recovery and no acceleration is going to happen. Rather, investors should expect a gradual return to normality.

For the long-term, normalization is good enough to generate market-beating returns, as S&P Global remains one of the strongest and most resilient value accumulators in the market. However, in the near term, I don’t expect significant upside, as there are no real drivers for positive surprises.

Therefore, I maintain a Buy rating, but I wouldn’t go aggressive on increasing my position at these levels.