S&P Global (SPGI +1.40%) is a large, $162 billion market cap business. Despite its size, I wouldn't be surprised if you have never heard of it. It isn't a consumer-facing operation, which limits its visibility to the average person.
But this company is very critical to our financial system. That's because S&P Global provides credit ratings and various financial data and information that support the smooth functioning of capital markets. And its shares have climbed 86% in the past five years.
The business might be on your investable radar. Should you buy S&P Global stock while it's below $550?
Profitable growth
In 2024, the business increased revenue 14% year over year to $14.2 billion. This gain was driven by a 31% sales jump in the Ratings segment. Revenue rose 6% in the Market Intelligence division, which is the biggest money maker.
Last year's top-line figure was up 178% compared to 2014. What's notable is that there wasn't a single down year in the last decade. And since 2019, S&P Global has reported five straight years of double-digit revenue growth.
The business clearly benefits from a durable expansionary backdrop. Macro forces generally work in S&P Global's favor. Things like GDP growth, expanding M2 money supply, and higher asset prices all support greater demand for what this business offers. Unless capitalism is going away, there's minimal threat of obsolescence here, which reduces risk for investors.
Perhaps even more impressive is S&P Global's profitability. Its adjusted operating margin was a stellar 49% last year. Executives believe it will be similar in 2025. And with low capital expenditures, the ability to generate lots of free cash flow helps fund dividends and share buybacks.
NYSE: SPGI
Key Data Points
Economic moat
Another factor that points to S&P Global being a very high-quality enterprise is the presence of an economic moat. In other words, the company has developed sustainable competitive advantages that protect its industry position.
In particular, there's a network effect at play. A large corporation looking to raise debt should want to obtain a rating for their issuance from S&P Global because of how widely accepted it is as an industry standard. If a rating isn't obtained, then there could be higher interest expenses and lower investor demand.
On the other side, these investors might only allocate capital if a corporate bond is stamped with a rating from S&P Global, as it limits their risk.
The company's products and services are so ingrained in the financial system, with core relationships built with key stakeholders, that it seems virtually impossible to see a new entrant tap into the industry in any meaningful way. Investors and issuers have come to trust this company when making critical decisions. And that's a difficult position to challenge.
Return potential
The market is aware of this company's investment merits, so it rarely trades at a bargain valuation. The current price-to-earnings (P/E) ratio of 42.6 is 10% higher than the trailing-10-year average.
According to analyst estimates, the company's earnings per share (EPS) will grow at a compound annual rate of 11% between 2024 and 2027. This outlook seems reasonable; it doesn't imply monster growth.
But at the current level, I'm not confident S&P Global can outperform the S&P 500 over the next five years. Even with the benefit of starting at a lower valuation in late February 2020, shares failed to produce a better return than the benchmark in the last five years (as of Feb. 27). That's not an encouraging trend.
If the P/E ratio were closer to 30, then the stock would look more interesting. This is a competitively advantaged business that registers healthy growth and sizable profits. I don't think shares are a buy below $550, but they could be if the valuation becomes more compelling.
