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S&P Global Inc. (NYSE:SPGI), perhaps still better known as the successor of McGraw-Hill to some, has seen many changes over the past year. Not the least is because of a huge $44 billion tie-up with IHS Markit, as announced in 2020.
This deal created a true giant in the world of business intelligence, financial information, and analytics. Shares held up quite well last year, even as S&P Global Inc. shares joined the 2021 rally amidst low interest rates and valuation multiple expansion. A re-rating of valuations and higher interest rates in 2022, amidst rising interest costs, could hit the business hard, but overall shares have held up quite well.
A Recap
In February 2022, S&P Global Inc. announced its 2021 results, weeks ahead of the closing with IHS Market. The core business posted an 11% increase in full year sales, to $8.3 billion at the time, posting huge profits in the meantime with adjusted earnings reported at $3.3 billion. GAAP earnings came in at $3.0 billion, with adjusted earnings posted at $13.70 per share.
The focus of the business, executives and forward looking statements was on the closing of the IHS deal, which took place by the end of February. Following closing, S&P announced the sale of its Leveraged Commentary and Data business in a $650 million deal in April to peer Morningstar (MORN). The deal was needed to obtain EC approval, while it, of course, aided to reduce leverage as well.
In May of last year, S&P Global Inc. announced first quarter results, a quarter during which the IHS deal closed, and the addition started to contribute from March 1. With the deal only closing during the quarter, the actual quarterly results were not that telling. The company updated its guidance reflective of events and the timing of the deal, seeing more than 40% reported sales growth in 2023.
Adjusted for the timing of the deal, and assuming the deal would have closed on January 1, the company did indeed cut the guidance. Pro forma sales for 2022 were now seen at just low single digits, compared to a previous guidance in the mid single digits. Earnings were now seen between $13.00 and $13.25 per share, down from a previous midpoint of $13.40 per share. This comes amidst initial dollar strength, but moreover uncertainty in the world following the conflict between Russia and Ukraine.
Net debt was reported at $7.0 billion, which was a very reasonable amount given the earnings power of the business. The relative low leverage ratio is probably one of the reasons why shares have not been hit hard by higher interest rates last year. Needless to say, valuations were still demanding as shares traded at $350 in May of last year (down from a high around $470 in 2021) with shares trading at 26–27 times adjusted earnings seen at the time.
Stabilization
Since urging a cautious tone in May, S&P Global Inc. has seen shares trade in a $300-$400 range, with shares trading at the higher end of the range late summer, falling below the lower end of the range in the fall, now exchanging hands at $371.
The news was quite eventful since May. In June of last year, the company withdrew its full-year guidance as macroeconomic conditions hurt issuance volumes and the related ratings on them in a big way. When the company posted its second quarter results in August, the company initiated a guidance again, although it only called for adjusted earnings between $11.35 and $11.55 per share, quite a lower number compared to the outlook from May. S&P cut the guidance further to $11.00-$11.15 per share alongside the third quarter earnings release.
Net debt ballooned to $8.4 billion, as the company has been spending significant sums on share buybacks, now reporting a diluted share count of 330 million by the end of the quarter.
With these shares now trading at $371 the company supports a massive $122 billion equity valuation, or $130 billion enterprise valuation. This remains a huge number for a business which is generates revenues just below $12 billion per annum here, as the business is hit hard by lower activity levels in ratings, which happens to be a very profitable segment as well. Needless to say, valuations are demanding given the outperformance of the shares and reduced earnings expectations, pushing up the earnings multiples to 30–35 times, although not based on peak profits of course.
Further Optimizations
In November, the company announced its intention to sell the Engineering Solutions business, not a core part of the business. The unit was acquired with the purchase of IHS and generated $95 million in third quarter sales, reporting an expense base of just a million less for the same quarter. After adding back amortization charges (and some smaller items) the unit generated a $17 million adjusted profit for the quarter, still subpar compared to the overall profitability of the company.
In December, the company set some ambitious targets for 2025, targeting 7-9% organic growth and operating margins around the 50% mark, supporting 10-15% growth in earnings per share.
In January of this year, S&P Global announced that it has reached a $975 million deal to sell its Engineering Solutions business to KKR. With a revenue run rate of just below $400 million, the deal tag only comes in at around 2.5 times sales, a huge discount vs. its own valuation at around 10-11 times sales, albeit explained by the inferior growth profile and certainly margins.
After-tax proceeds are pegged at just $750 million, which is equivalent to just 0.6% of the enterprise value, while more than 3% in sales will leave the door, somewhat disappointing proceeds if you ask me.
What Now?
The truth is that S&P Global Inc. is a massive show-me story here. While net debt has inched up quite a bit in absolute terms, a 50% margin profile (as a target) reveals huge earnings power and potential to deleverage, as the issue here is simply related to the valuation, currently trending at 30-35 times earnings.
Even if earnings revert to $13 per share, if I add back $2 per share based on potential recovery in the ratings market, S&P Global Inc. multiples still come in at 28 times, as a recovery and organic growth is needed to drive appeal.
The reality is that S&P Global Inc. shares simply feel a bit too rich as there are still many moving parts nearly a year post the IHS deal, leaving me a cautious bystander for now, not seeing a reason to become actively involved here.
