S&P Global Inc.

Executive Summary

3-Sentence Investment Thesis

S&P Global is a dominant oligopoly player in credit ratings (with Moody's forming an effective duopoly) and holds irreplaceable positions in financial indices (S&P 500), commodity benchmarks (Platts), and financial data. The business enjoys 80% recurring revenue, 49% adjusted operating margins, and has compounded revenue at 11-14% CAGR across divisions over 14 years. Despite premium valuation (~40x GAAP P/E, ~32x adjusted P/E), the durable competitive moats, capital-light model generating $6B+ annual free cash flow, and 52-year dividend growth streak justify a WAIT position for accumulation at lower prices.

Key Metrics Dashboard

Verdict

WAIT - Exceptional business, premium valuation. Accumulate at weakness.

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Phase 1: Risk Analysis (Inversion)

"Tell me where I'm going to die, so I won't go there." - Charlie Munger

What Could Destroy This Business?

1. Regulatory/Legal Risk - MODERATE-HIGH

The Risk: Credit rating agencies (CRAs) have faced intense regulatory scrutiny since 2008. The "issuer-pays" model creates inherent conflicts of interest that regulators worldwide periodically threaten to reform.

Evidence:

• Post-2008 regulations (Dodd-Frank, ESMA) increased compliance costs but also raised barriers to entry
• DOJ settled with S&P for $1.4B in 2015 over mortgage securities ratings
• Ongoing concerns about CRA independence and rating shopping

Probability × Impact:

• P(Major regulatory change to issuer-pays): 15% over 10 years
• Impact if occurs: 25-30% reduction in Ratings margins
• Expected loss: 4-5% of current value

Mitigating Factors:

• Duopoly structure actually benefits from regulation (higher barriers)
• Global regulatory fragmentation makes unified reform difficult
• Ratings business only 27% of revenue post-IHS Markit merger

2. Debt Issuance Cyclicality - MODERATE

The Risk: Ratings revenue is highly correlated with debt issuance volumes, which are cyclical and sensitive to interest rates.

Evidence:

• 2022: Ratings revenue dropped 26% as rates rose and issuance collapsed
• 2024: Ratings revenue +20% as issuance recovered
• Transaction revenue is 43% of Ratings segment

Probability × Impact:

• P(Another major issuance drought): 30% over 5 years
• Impact if occurs: 15-20% drop in consolidated revenue
• Expected loss: 5-6% of current value

Mitigating Factors:

• 57% of Ratings is now surveillance/non-transaction (recurring)
• 80% of total company revenue is recurring
• Diversification across 5 segments reduces cyclicality

3. Technological Disruption - LOW-MODERATE

The Risk: AI and fintech could disrupt traditional financial data and analytics businesses.

Evidence:

• Bloomberg, Refinitiv, and startups investing heavily in AI
• Alternative data sources challenging traditional data monopolies
• Regulatory acceptance of AI-based credit assessment growing

Probability × Impact:

• P(Material disruption in 10 years): 20%
• Impact if occurs: 10-15% erosion of Market Intelligence margins
• Expected loss: 2-3% of current value

Mitigating Factors:

• S&P Global investing $200M+ annually in Vitality (new products)
• Kensho AI acquisition in 2018
• Network effects and switching costs protect core franchises
• Regulatory mandates require S&P/Moody's ratings for many transactions

4. Integration Risk (Post-IHS Markit) - LOW

The Risk: The 2022 IHS Markit merger ($44B) created integration challenges.

Evidence:

• Synergies exceeded targets: achieved $600M+ cost synergies
• Mobility and Commodity Insights segments performing well
• Culture integration largely complete

Current Status: Risk largely passed. Integration successful.

5. Key Person / Management Risk - LOW

The Risk: Leadership transition in November 2024 (Martina Cheung became CEO).

Evidence:

• Douglas Peterson (former CEO) orchestrated successful IHS Markit integration
• Martina Cheung was COO and has deep institutional knowledge
• Q4 2024 results under new leadership exceeded guidance

Assessment: Smooth transition with strong bench depth.

Risk Register Summary

Overall Risk Assessment: MODERATE. Risks are manageable and largely priced in. The diversified business model reduces single-point-of-failure risks.

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Phase 2: Financial Analysis

Historical Financial Performance

Revenue (14-Year CAGR by Division)

Total 2024 Revenue: $14.2B (+14% YoY)

Profitability Metrics

Key Observations:

1. 2022 margins compressed due to Ratings cyclicality + merger integration
2. 2023-2024 shows strong margin recovery
3. Adjusted EPS grew 25% in 2024 - exceptional
4. Free cash flow conversion consistently excellent (>90% of net income)

ROE Decomposition (DuPont Analysis)

Note: ROE is elevated due to significant goodwill from IHS Markit acquisition creating lower equity base.

Capital Allocation

*Included IHS Markit post-merger return of capital

52 consecutive years of dividend increases - Dividend Aristocrat status.

Balance Sheet Strength

Assessment: Balance sheet carries merger-related debt but is manageable with strong cash generation. Company actively deleveraging.

Valuation Analysis

Current Valuation (Dec 2024)

DCF Valuation

Assumptions:

• Risk-free rate: 4.5%
• Equity risk premium: 5.0%
• Beta: 1.1
• WACC: 9.0%
• Terminal growth: 3.5%

Base Case:

• 2025 Adj. FCF: $6.0B
• Years 1-5 FCF CAGR: 8%
• Years 6-10 FCF CAGR: 5%
• Terminal FCF: $12.5B

DCF Fair Value Range: $450 - $640 per share Central Estimate: $520-550 per share

Current price of $505 is approximately fairly valued to slightly undervalued.

Relative Valuation

Assessment: SPGI trades in-line with rating agency peer (MCO) and below MSCI. Valuation is fair relative to comps.

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Phase 3: Moat Analysis

Moat Sources

1. Regulatory Moat - VERY STRONG (Ratings)

Description: SEC NRSRO (Nationally Recognized Statistical Rating Organization) designation creates a regulatory oligopoly. Only 10 NRSROs exist globally, but S&P, Moody's, and Fitch control 95%+ of the market.

Evidence:

• Many regulations require ratings from recognized agencies
• Basel III/IV uses external ratings for capital calculations
• Investment mandates often specify "investment grade by S&P/Moody's"
• Obtaining NRSRO status requires extensive track record

Durability: 20+ years - deeply embedded in global financial architecture

Measurable Impact:

• 56.5% operating margins in Ratings (vs. 30-35% for typical data businesses)
• Zero meaningful new entrants in 30+ years

2. Network Effects - STRONG (Indices)

Description: S&P Dow Jones Indices benefits from self-reinforcing network effects. More assets track S&P indices → more liquidity → more assets track.

Evidence:

• $3.3 trillion in ETF AUM based on S&P DJI indices
• S&P 500 is THE benchmark for US equities globally
• SPY, VOO, IVV among world's largest ETFs
• Derivatives volume: 1.1B S&P 500 E-mini contracts traded annually

Durability: 20+ years - benchmark status is self-perpetuating

Measurable Impact:

• 68.9% operating margins (highest in company)
• Asset-linked fees provide durable revenue
• 14% revenue CAGR over 14 years

3. Switching Costs - STRONG (Market Intelligence, Commodity Insights)

Description: Enterprise data platforms become deeply embedded in customer workflows, creating high switching costs.

Evidence:

• Capital IQ/S&P Capital IQ Pro integrated into investment workflows
• Platts price assessments are contractual benchmarks
• 96%+ renewal rates on subscription products
• Multi-year contract terms

Durability: 10-15 years - but requires continued investment in product

Measurable Impact:

• 80% of revenue is recurring
• Subscription revenue up 6% YoY (steady)

4. Data Assets / Intangible Assets - STRONG

Description: Decades of proprietary data and methodologies create unique, irreplaceable assets.

Evidence:

• 160+ years of ratings history
• Platts price assessments used in $400B+ of physical commodity contracts
• Proprietary benchmarks (S&P 500, GSCI, Platts Dated Brent)
• $14B in goodwill/intangibles from IHS Markit

Durability: 15-20 years - historical data cannot be replicated

Moat Scorecard

Moat Erosion Test

What could erode this moat?

1. Regulatory reform of issuer-pays model - Unlikely without major crisis
2. New benchmark indices gaining traction - Minor erosion possible
3. AI-based credit assessment acceptance - 10-15 year risk
4. Alternative data replacing traditional platforms - Ongoing investment required

Assessment: Moat is among the widest in financial services. The combination of regulatory protection, network effects, and data assets creates a nearly impregnable competitive position.

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Phase 4: Decision Synthesis

Investment Case Summary

Bull Case:

1. Dominant oligopoly positions with regulatory moats
2. 80% recurring revenue with 96%+ retention
3. 49% operating margins expanding toward 50%+
4. $6B+ annual FCF growing 8-10% annually
5. Excellent capital allocation (buybacks + dividends)
6. Secular tailwinds: ESG, private markets, data/analytics demand

Bear Case:

1. Premium valuation (~32x adjusted earnings)
2. Cyclical Ratings exposure to debt issuance
3. $10B+ net debt from merger
4. Low dividend yield (0.77%)
5. Limited upside at current prices

Position Sizing Framework

Given the risk analysis and moat assessment:

Recommended Position: 4-5% at Strong Buy price ($420)

Entry Price Targets

Monitoring Metrics & Thresholds

Expected Return Analysis

5-Year Return Scenarios (from $505):

Probability-Weighted Return:

• Bear (25%): -2.2%
• Base (50%): 5.9%
• Bull (25%): 12.2%
• Expected Return: 5.4% + 0.8% dividend = 6.2% annually

At current prices, expected returns are below our 10% hurdle rate. Wait for better entry.

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Final Verdict

Investment Decision

Action Items

1. Add to watchlist with price alerts at $460, $440, $420
2. No immediate action at current $505 price
3. Accumulate aggressively if price reaches $420-440 (major market correction)
4. Monitor: Q1 2025 earnings (Feb 2025 release) for Ratings trends

Summary

S&P Global is one of the highest-quality businesses in the financial sector, with a wide moat that should persist for decades. The company's dominant positions in credit ratings, indices, and commodity benchmarks generate exceptional economics (49% margins, $6B FCF). However, at ~32x adjusted earnings, the stock is fairly valued to slightly overvalued, offering limited upside and margin of safety. The appropriate strategy is to WAIT for market volatility to provide a better entry point in the $420-460 range, where expected returns would meet our 10%+ hurdle rate.

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Appendix: Source Documents

All source documents available in /research/analyses/SPGI/data/:

• S-P-Global-2024-Annual-Report.pdf
• S-P-Global-2022-Annual-Report.pdf
• S-P-Global-2021-Annual-Report.pdf
• S-P-Global-2020-Annual-Report.pdf
• S-P-Global-Investor-Fact-Book-2024.pdf (146 pages)
• S-P-Global-4Q-FY-2024-Earnings-Release.pdf
• S-P-Global-4Q-FY-2023-Earnings-Release.pdf
• historical-prices-eodhd.json (5 years daily)
• dividends.md (5+ years history)

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Analysis prepared using Warren Buffett value investing methodology with first-principles thinking.

Disclaimer: This analysis is for informational purposes only and does not constitute investment advice. Past performance does not guarantee future results. Always conduct your own due diligence before making investment decisions.