FW: Adding S&P Global to the Focus Equity portfolio #researchtrades

Recently we have added S&P Global (SPGI) to the Focus Equity portfolio.

S&P Global is a highly profitable company with established “information” businesses that have deep moats in attractive industries. Their history stretches back over 160 years. Standard and Poor’s rating agency was created in 1941.

Business lines

Ratings: (45% of revenue and 51% of operating income) is a key business for S&P Global. Ratings industry is a duopoly between S&P and Moody’s who combined are over 90% of US ratings market. Bond ratings are necessary workflow for issuers and buyers. Revenue is based on new issuance (50%) and recurring fees for maintaining ratings. Over past 3 years, segment has averaged 7% growth and over 65% operating margins – basically a big cash cow.

Indices: (13% of revenue 18% of operating income) Own S&P 500 index fund and other indices. They gain royalties from ETF and funds using their indices and have benefited from the growth in passive investing. Over past 3 years, this segment has averaged 13% growth and over 70% operating margins – another highly profitable segment.

Market Intelligence: (28% of revenue 18% of operating income) Segment provides information and services to financial markets (Capital IQ) and businesses (supply chain analysis and credit risk solutions). Segment has high recurring revenues and stands to gain from pending merger with IHS Markit. Over past 3 years, segment has averaged 6% growth with over 30% operating margins.

Platts: (12% of revenue 12% of operating income) Industry leader in data and analysis for oil and gas markets. They have been expanding into trade flow analytics, derivatives and new benchmarks. Over past 3 years, segment has averaged 6% growth and over 50% operating margins despite falling energy prices.

Overview

Over the past 4 years, S&P Global has grown earnings 19% supported by rising margins and revenue. They have little debt (minus cash) and a long term credit rating of ‘A3’ from Moody’s. The firm has been focused on returning capital to shareholders. Since 2015 they have returned $9.7b through share buybacks and dividends, reducing outstanding shares by 12%. They have a stated goal of returning 75% of free cash flow to shareholders.

S&P Global is a top ranked ESG firm – Sustainalytic rank 92, MSCI ranks A and RepRisk rating is zero (lower is better!).

In November S&P Global announced a merger with IHS Markit pending regulatory approval. The all stock deal for $44b is expected to close in the second half of this year. IHS has segments that focus on Financial Services, Transportation, Resources and technical engineering. Like S&P Global they have lots of proprietary data and provide analysis to clients. Known brands of IHS Markit owns are CARFAX, iBoxx indices, Ipreo, Thinkfolio, automotiveMastermind and shipping data dating back to 1764. S&P Global believes that this acquisition increases their data breath and analytical capabilities allowing them to expand their addressable markets significantly. S&P Global owns Kensho (artificial intelligence) and Panjiva (supply chain management) who will benefit from greater data pools and a broader client base.

Current valuation is attractive based on free cash flow valuation. After the merger, S&P Global is expecting to increase margins through synergies by about 200 bips for each of the next two years.

Starting weight S&P Global (SPGI) 2.5% in the Financial Sector

Funded from

APPL .75%

IVV .75%

BAC .50%

RMD .50%

Both Apple and Resmed have grown in weight due to strong performance. Bank of America has rebounded sharply and further upside may be more of a grind. We still consider these names as core holdings and are trimming on strength.

I look forward to discussing S&P Global next Tuesday at the RM/Research meeting. Please see attached presentations and let me know if you have any questions.

Thanks,

John

[category Equity Earnings]

[tag SPGI]

$SPGI.US

John R. Ingram CFA

Chief Investment Officer

Partner

Direct: 617.226.0021

Fax: 617.523.8118

Crestwood Advisors

One Liberty Square