Investors have had a lot to deal with in the past year. In 2021, stocks reached sky-high valuations. But with persistent inflation and rising interest rates, markets have gotten knocked down, taking even the best companies with them.
S&P Global (SPGI +0.97%) is a perfect example of this. Despite a strong competitive advantage and high profit margins, the financial services company finds its stock down 25% year to date -- giving you a chance to buy it at a value not seen in years.
NYSE: SPGI
Key Data Points
Few competitors in a highly regulated industry
When a company wants to raise money by issuing debt, investors need to understand its risks to determine how likely it is able to pay off the principal and interest on that debt. S&P Global provides credit ratings to companies across the globe and is an integral part of the fixed-income market. Credit ratings tell investors how much risk a company has, so that those investors can charge interest rates appropriate for the amount of risk they take lending to that company.
S&P Global has a huge advantage in the credit ratings business. High barriers to entry make it difficult for new competitors to enter the industry. As a result, three companies dominate the industry: S&P Global, Moody's Corporation, and Fitch Ratings. S&P Global has a 40% share of this market and is tied with Moody's for the lead.
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One part of the business slowed down, while others picked up
Ratings make up a significant portion of S&P Global's business, making up 49% of its total revenue in 2021. As a result, its reliance on the ratings business could make earnings volatile. That's because the business depends on how much debt companies are issuing at a given time.
Debt issuance dropped off in the first quarter. Unfavorable economic conditions made companies hesitant to issue debt in the quarter, and S&P Global saw debt issued drop 35% in the U.S. and 15% globally. Ratings revenue fell 15% to $868 million as a result .
S&P Global still grew revenue in the quarter despite less debt issuance. That's because it has other ways to bring in cash, including selling research and analytics tools to investors, collecting fees from its index products such as the S&P 500, and collecting fees from data and analysis it provides to automotive suppliers. This non-ratings revenue grew 51% from the first quarter of last year and includes one month of revenue from IHS Markit, S&P Global's newly acquired company.
The market sell-off creates a buying opportunity for this Dividend Aristocrat
S&P Global has a solid competitive advantage in the ratings business and diverse income streams from other sources. The business model is asset-light, meaning operational expenses are low while margins are high. Gross profit margin is the difference between revenue and cost of goods sold, divided by revenue, and can tell you how much money the company has to cover obligations like taxes and debt. For 30 years, S&P Global's gross profit margin has been above 50% -- and it keeps growing.
The company delivers investors a solid dividend yield of 0.89% and has grown its dividend for 48 years straight -- making it a Dividend Aristocrat, two years away from the exclusive Dividend Kings club.
The company has not been immune to market volatility, and the stock is down nearly 25% year to date. This creates an opportunity for investors to buy the company at a price-to-earnings ratio (P/E) of just 25.7 -- a level not seen since early 2019.
S&P Global is a stellar company with an appealing competitive advantage, multiple income streams, and high margins, and it might make a tempting buy at its current valuation.
