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Standard & Poor’s is a household name for investors – the company’s S&P 500 Index is the primary benchmark for most stocks. Corn Global S&P (NYSE: SPGI), the company that owns the S&P Dow indices through a partnership with CME Group and News Corp., may not be as well known.
The company, which changed its name to McGraw Hill Financial in 2016, has been a strong and consistent player in a variety of market environments – and not just because of its indices. In fact, most of its revenue comes from global rating and market intelligence activities. Let’s take a closer look at why S&P Global is a financial stock you should get to know.
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S&P Global beats S&P
S&P Global has been one of the best performing financials this year, up more than 28% on Wednesday at noon – far outperforming its own S&P 500, which is down around 2.5%, and the the entire financial sector, which is down about 18%. Since 2016, the stock has posted an annualized return of around 31% and has achieved positive annual returns every year.
What drove S&P Global’s success? Let’s start with his scoring activity, where he’s a big fish in a big pond with very few fish in it. In fact, there are only three major companies that assess the creditworthiness of bonds issued by private and government entities: S&P Global, Moody’s, and Fitch. S&P Global and Moody’s are the two leaders, each with around 40% market share, Fitch less than half. It is a market leader in an extremely limited pool of participants. Additionally, the credit ratings industry is not likely to see much competition – it is not optimal to have too many companies rating bonds or weakening ratings. In addition, the barrier to entry is very high, as the space is well regulated.
However, the income from the rating activity is closely linked to the amount of debt issued. In the first quarter, global bond issuance rose 11%. This translated into a 19% increase in year-over-year revenue to $ 825 million for SPGI’s rating business. That was about 46% of the company’s $ 1.7 billion first-quarter revenue. The company expects debt issuance to decline the rest of the year due to the recession, but S&P Global has other sources of revenue – more, in fact, than its main competitor Moody’s.
Various sources of income
S&P Global’s second-largest revenue driver is the Market Intelligence business, which provides data, research, and tools to help investment professionals, government agencies, businesses and other organizations gain insight from. valuable market. Market Intelligence generated revenue of $ 519 million in the first quarter, or about 29% of total revenue. This and Platt’s, which provides pricing and analysis for the energy and commodities markets, are largely subscription-based. During the recession, both are expected to see their incomes decline, but they are strong businesses in the long run.
The S&P Dow Jones indices – which include the S&P indices as well as the Dow Jones indices – represent approximately 14% of the company’s revenues. In the first quarter, revenues from this business increased 20% to $ 259 million, mainly due to a 59% increase in exchange-traded derivatives fees and an 11% increase in fees related to exchange traded derivatives. active. The operating profit margin in the index business increased 90 basis points – or 0.90 percentage point – to 70% in the quarter.
Overall, the company posted a 59% increase in earnings per share to $ 2.62 in the first quarter. The operating profit margin jumped 610 basis points to 51% in the quarter, but has been in the range of 35% to 50% for each of the past four years. The company’s price-to-earnings ratio has climbed to 35 times earnings, which may be a bit high given expectations of weak growth over the next few quarters – but in the long run it’s not far off. of the historical range, and the stock has constant long-term earnings potential.
Even still, with its gap in the ratings industry and strong income diversity, S&P Global is one of the best buys in the financial industry.
This article represents the opinion of the author, who may disagree with the “official†recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.
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