The market plunged during the COVID-19 pandemic because economic activity came to a screeching halt and investors worried that companies wouldn't have enough money to keep the lights on during the lockdown.
But amid the downturn, one surprising winner was S&P Global (SPGI 0.54%). S&P Global is a renowned financial information company that provides data, analytics, and credit ratings to markets worldwide, and it benefited from the turmoil because the demand for market intelligence and credit rating analysis soared. Will that bump continue?
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Making money from bond issuances
In 2020, companies have turned to the bond market to raise cash en masse. This has been a huge boost to S&P Global, which is one of the largest credit rating agencies and generates revenue every time companies use its credit rating to issue bonds.
S&P Global's credit rating business is a high-moat asset. The barriers to entry are fairly low -- it's not hard to hire financial analysts to rate bonds -- but bond issuers hire S&P Global because it has a strong brand in the financial services industry and therefore investors and issuers trust the company's ratings more than a less well-known ratings company. Moody's enjoys a similar competitive advantage with its credit ratings brand, and it would be really tough to establish a brand new credit ratings firm and compete with either company.
The company's earnings report from the second quarter of 2020 shows that all of its segments grew, but revenue from ratings grew the most.
| Financial Metrics | Q2 2020 | Q2 2019 | Year Over Year Change % |
|---|---|---|---|
| Ratings | $1,006 million | $801 million | 26% |
| Market intelligence | $516 million | $487 million | 6% |
| Platts | $217 million | $213 million | 2% |
| Indices | $240 million | $235 million | 2% |
| Corporate & other | ($36) million | ($32) million | 13% |
| Total revenue | $1,943 million | $1,704 million | 14% |
Data source: S&P Global financial reports.
Ratings is S&P Global's largest source of revenue, which helped drive a healthy rate of total revenue growth, but other business lines performed well too. Market intelligence provides access to financial data, and financial market participants likely needed access to data more than ever. Platts provides commodity price data such as analytics on oil and gas markets, and it saw an increase in subscriptions in the quarter. Finally, the company's indices business powers many passive ETFs and also benefited from an increase in subscriptions.
Despite experiencing one of the sharpest recessions in history, S&P Global is thriving because its business lines are more important than ever when companies need to raise capital or have access to information.
Improved profit margins
What's great about S&P Global's business is that it has proven to be resilient during both good time and bad times. In the years leading up to 2020, the company delivered strong revenue growth due to strong sales of its financial software and health bond issuance volumes. What's more, the company has been able to convert higher revenue into greater profitability over time.
SPGI Revenue (TTM) data by YCharts
Building on this trend, S&P Global has been able to improve its adjusted operating profit margin in 2020 by reducing expenses due to COVID-19 cost-cutting measures. In a sign of strong leadership, S&P Global responded quickly to the effects of the pandemic. Cost-cutting measures included freezing its hiring process, decreasing advertising and promoting, and lowering its outside consulting services.
In retrospect, the company didn't really need to cut spending. Sales increased, which translated into much higher margins as the company also made progress on expenses. At the end of the day, S&P Global proved that its business is resilient and that its expenses can be adjusted if needed.
A business for any economic environment
S&P Global has proven to be one of the most resilient companies in the world. The company has posted strong financial performance during good times and has held up extremely well during the COVID-19 pandemic. As long as companies need to issue bonds and have access to financial information -- which is almost always -- S&P Global will likely be there to serve their needs.
