A closer look at S&P Global
In my past two e-mails, I took a "first look" at the six new stock positions Bill Ackman initiated for his firm, Pershing Square (PS), during the second quarter, along with excerpts from his latest shareholder letter.
I covered the first three – Netflix (NFLX), Mastercard (MA), and Visa (V) – in Friday's e-mail. And in yesterday's e-mail, I glanced at the remaining three – S&P Global (SPGI), Intercontinental Exchange (ICE), and Alcon (ALC).
Regarding S&P Global, I wrote:
S&P is a great business, and the stock has been a monster. It rose from a low of around $20 in 2009 to an all-time high of $550 a year ago.
But since then, due to fears of AI replacing its services, the stock has fallen 24% to close on Friday at $418.80...
Bill thinks investor fears are overblown. He says the stock is trading at "a bargain level for a company that is often cited as one of the world's highest-quality businesses."
So today, let's take a look at S&P Global's historical financials and valuation...
Starting with revenue and operating income, we can see that both metrics took a hit during the global financial crisis but then grew tremendously from 2010 onward:
Note that the revenue jump and profit slump in 2022 were due to a $140 billion all-stock merger with data analytics firm IHS Markit.
S&P Global has fabulous gross and operating margins. They declined after the merger but have improved since then:
Free cash flow ("FCF") went nowhere from 2006 through 2016. But it has nearly quadrupled since then and has been steady the past two and a half years:
The company primarily uses its FCF on share repurchases, though it also periodically makes small acquisitions (the exception being IHS Markit) and pays a tiny dividend (currently 0.9%):
Its diluted share count has gone down steadily from 2006 until 2022, when it spiked 32% due to the merger (offset by a massive $12 billion of repurchases that year). It has declined 6% since then:
S&P Global went from net cash of $1.5 billion in 2021 to net debt of $10.4 billion the next year. That's because it assumed $4.8 billion of IHS Markit's debt and bought back $12 billion of stock in 2022.
But its current net debt of $11.6 billion isn't a problem, as it's equal to only the past two years' worth of FCF:
Overall, S&P Global's historical financials are outstanding. It's a wonderful, high-margin business with low capital expenditures. It grows nicely and generates gobs of FCF, 85% of which it has committed to returning to shareholders in the form of share repurchases and dividends.
Not surprisingly, a business of this quality has historically traded at a premium multiple. As growth took off in 2016, so did the stock's forward price-to-earnings (P/E) ratio... It rose to a peak of 35 times in 2024, then lowered to around 30 times a year ago.
But then the stock – and its earnings multiple – fell sharply due to AI and "SaaSpocalypse" fears, dropping to around 20 times earlier this year. It currently trades at 23 times this year's consensus analysts' estimates and 20 times next year's:
I think Bill is likely right that S&P Global's stock will outperform in the coming years. It's a far-above-average business trading at a market multiple.
My team and I at Stansberry's Investment Advisory will take a deeper dive. If we decide this is our best stock idea and recommend it in an upcoming monthly issue, our subscribers will be the first to know. You can become one by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.