🎙️ Essential Intelligence

Happy Monday, everyone. This week, we’re mixing things up by taking a break from the financial news cycle. (Back to that next week.)

Instead, we have a few special editions today, Wednesday, and Friday, followed by Sunday’s in-depth interview with a professional investor on his strategy and approach.

Today is a special edition centered on discussing the business and valuation of S&P Global, the company behind the S&P 500 index. You can check out the companion podcast episode here to dive even deeper.

— Matthew & Shawn

Here’s today’s rundown:

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S&P Global: Essential Intelligence

S&P Global, known for its S&P 500 index, has greatly benefited from the passive investing boom. Yet, it operates multiple business segments that extend well beyond indexing.

It runs a ratings division (50% of the bond rating market share), market intelligence services, and a technology-driven data platform. The company has become a leader in credit ratings and financial data.

Below are a few high-level takeaways from our new Millennial Investing podcast episode on S&P Global, a joint episode between our Shawn O’Malley and investor Daniel Mahncke. 

As Shawn says, S&P Global is a powerful and cutting-edge platform, and the companies that you use also use S&P Global. For example, Yahoo Finance’s data is all powered by S&P.

Its stock has compounded at almost 16% per year over the past three decades, compared with around 11% per year over that same time for the S&P 500 index. Its market capitalization sits at about $165 billion, employing about 40,000. S&P Global shares have risen 20% in 2024 and about 107% over the past five years, while the S&P 500 benchmark has gained 90% over the same period. 

Ratings Biz

The ratings business is crucial for corporate borrowing because many companies rely on ratings to access public markets and secure favorable interest rates. The division has shown resilience after recovering from reputational damage during the 2008 financial crisis thanks to increased regulatory oversight.

Here’s Shawn: “Fortunately for these companies, the entire world of fixed income has been built around them being key intermediaries. For example, investment funds may only be able to invest in certain types of bonds based on a minimum credit rating from one of the major agencies. And regulated entities like banks and insurance companies have hard limits on the types of bonds they can hold based on their credit rating quality.

“Ratings from S&P and Moody’s really set the standard globally for how investors interpret the risks connected to certain companies and governments, and the types of debt they issue.”

Essentially, investors and regulators mostly accept only ratings from the big three ratings agencies, “which pushes more companies and governments hoping to borrow money to secure credit ratings from these agencies. That further entrenches them as the go-to sources for ratings.”

Market Intelligence

S&P Global earns recurring subscription revenue from its Capital IQ platform, which provides financial data and analytics to companies, banks, and governmental agencies. It competes with firms like Bloomberg and Factset. The subscriptions usually cost tens of thousands per year. 

Per S&P Global,  “Capital IQ Pro empowers informed decisions with access to 62,000-plus public companies, including 47,000 active companies with current financials, and a database of 52 million-plus private companies, including over 1 million early-stage companies.”

It has transaction data on more than 980,000 mergers and acquisitions, 646,000 public offerings, and 550,000 rounds of funding, plus comprehensive macroeconomic data on indicators like inflation, employment, GDP, and more. It also offers a full spectrum of strategic risk insights for 200-plus countries and territories. 

In a nutshell: S&P Global offers subscribes a ton of analytics to make investment decisions. 

“If you have ever worked in investment banking or know someone who has, there’s a good chance they used S&P’s Capital IQ platform,” Shawn says. “This is the type of all-in-one platform that you might imagine people on Wall Street rely on to pull data on almost everything you can imagine, and you wouldn’t really be that far off for thinking that.”

Index business

S&P manages thousands of indexes, including the widely recognized S&P 500. The segment generates high margins through licensing agreements with investment funds and ETFs. In fact, though the index business is only ~10% of revenue, it posts the highest operating profit margins of any business unit in the company (69%). 

So while this isn’t as big of a business unit as you might think at around 10% of revenues, it’s very high margin. The growth of passive investing strategies has further solidified S&P’s position in the space. 

“What’s wonderful about this business is that investment funds seldom change the index benchmarks that they either track closely or measure their performance against,” Shawn notes.

“Doing so introduces liquidity and tax costs and can represent material changes in strategy that investors in these funds didn’t necessarily sign up for. So, there are trillions of dollars in investment funds tracking indexes managed by S&P, and S&P will continue to reap the rewards from fees for licensing those indexes to asset managers.”

Commodity insights and mobility

The commodity insights unit provides benchmark pricing data across various markets, while the mobility segment focuses on automotive industry data. Both units contribute to S&P's diverse revenue streams but are smaller compared to ratings and market intelligence.

The commodity insights unit’s core is S&P Platts, the leading independent provider of benchmark prices in commodity and energy markets. They compile the pricing data on everything from petroleum to iron ore, petrochemicals, crops, and metals. Revenue for the unit usually from either subscriptions or royalties from licensing the data to other providers.

Here’s Shawn again: “You can imagine that this sort of data isn’t just valuable to investors but also to the companies competing in these spaces, as well as farmers, engineers, governments, and geoscientists. The business tends to be quite sticky because it’s baked into a lot of long-term agreements. For example, with futures contracts tied to the price of oil, both sides have to agree to go off the pricing data provided by a third-party, and that third-party’s data may be directly or indirectly tied to S&P’s commodity insights business unit.”

As for mobility, S&P provides data for the automobile industry. One way is through CarFax, which provides vehicle data to individuals and businesses. Its most well-known product is its vehicle history report. Other products include vehicle listings, car valuation, and buying and maintenance advice.

Financial performance and valuation

Across the board, S&P Global has posted strong financial health with high profit margins (40% operating profit margin) and consistent revenue growth (10%-plus annually). It has returned large chunks of capital to shareholders through stock buybacks and dividends, though its current stock valuation is high (around 45 times earnings and 31 times its free cash flows). Clearly, investors have recognized the business’ strength, pushing shares higher and higher.

“This is a tremendously profitable company with high-quality earnings, in the same league as companies like Meta and Microsoft for profit margins,” Shawn asserts.

“Analysts assessing a company’s financial health often use a measure called EBIT, which measures operating profits and stands for earnings before interest and taxes. S&P’s EBIT is about 16 times higher than its interest expenses, so the company has plenty of financial breathing room to absorb debt costs.”

Shawn argues that the company is positioned to benefit from ongoing growth in global debt markets. But potential risks include competition in market intelligence from advancements in AI, changing dynamics in corporate borrowing, and reputational risk.

This was a mere snapshot of what Shawn O’Malley and Daniel Mahncke cover in detail. If you’re interested in learning more about the case for, and concerns with, investing in S&P Global, listen to the full podcast episode right here. 

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Quick Poll

On Friday, we asked: Do you own any individual Utilities stocks?

— Just under half of respondents own individual Utilities stocks. One investor in Utilities stocks said, “Over the past year, I’ve become very interested in nuclear power, to support the immense power needs of AI data centers, among other things.” Another pointed to the “stable and growing dividends.”

— One respondent doesn’t own Utility stocks at the moment but might reconsider. “I have owned some in the past and am considering getting back in,” they wrote.

See you next time!

That's it for today on We Study Markets!

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