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S&P Global (SPGI) Credit Suisse US Financial Intelligence Equity Research Americas/United States S&P Global (SPGI) You Can’t Dent a Benchmark Rating: OUTPERFORM Target Price: $123 July 11, 2016 RESEARCH ANALYSTS Ashley N. Serrao, CFA Marcus Carney Research Analyst Research Analyst +1 212-538-8424 +1 212-325-1442 [email protected] [email protected] Photo: http://www.maris-interiors.co.uk/ DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. INITIATION REPORT RATING: OUTPERFORM PRICE (JUL 8 2016): $108.87 SPGI: You Can’t Dent a Benchmark TP: $123 Initiating with Outperform Collection of Valuable Benchmarks; SNL Amplifies Capital IQ & Platts SPGI a Collection of High-Margin, Fast-Growing Businesses (2015 operating EBIT margins and forecasted 3-yr CAGR in percentage points) S&P Global boasts a collection of high margin and iconic brands with strong competitive 2015 op margin 3-yr CAGR forecast moats and/or secular tailwinds spanning ratings (S&P), indices (S&P Dow Jones) and 80% 16% commodities information (Platts). Ultimately, this translates to pricing power, more durable revs during a downturn and significant free cash flow generation. We expect the latter to be 60% 12% deployed towards buybacks, organic investments (fixed income indices, commodities 40% 8% benchmarks) and brand extensions via selective acquisitions (rolling up the fragmented commodities information industry under Platts). In a similar vein, the recent SNL acquisition 20% 4% amplifies the value of Capital IQ and Platts, with unique industry content that should drive pricing power, provide new industries to grow into and build differentiated content sets (real 0% 0% estate, media etc.) and boost margins in Market Intelligence towards 35%+. S&P DJI S&P Ratings Platts Mkt Intel SPGI Ratings Revenue Mix less Cyclical than MCO; L/T Opportunities Attractive Less Cyclical Product Mix and Non-Transaction Activity Stabilize Revenues In our view, SPGI’s ratings business is better positioned to outperform Moody’s during a (2015 revenue mix by product and transaction type in percentage points) down-turn, given more relationship-based recurring revenues (54% of issuance revs vs. MCO SPGI 39% at MCO) and less exposure to more-cyclical structured products and high yield Gov t Gov t Struct Struct Trans 9% 12% issuance (21% vs. 28% at MCO). More broadly, the latter should drive a shallower down- 16% 19% Trans 46% HY cycle with strong refinancing pipelines also providing an offset. We are also bullish on the 61% 9% 21% international opportunity from the secular disintermediation of banks in the lending market in 28% HY Europe (even more so after Brexit), and continued maturation of emerging capital markets. 56% 9% 51% 16% IG 28% FIG With respect to the latter, we view the near-term opportunity as India (SPGI owns the Non 42% 17% Non IG FIG 54% leading ratings agency, CRISIL), with China being a much longer-term opportunity. 39% 40% 16% Other SNL and Platts Growth Under Appreciated & Revenue Stabilizers Hedge Volatility 11% SNL and Platts are two underappreciated assets that can together grow at a 10-12% clip highly cyclical modestly cyclical less cyclical annually over the next few years, driven by a combination of pricing power and new content. Platts and SNL Underappreciated Growth Assets We are constructive on both brands rolling up their respective fragmented industries, further (Yr/yr revenue growth in percentage points) entrenching their content sets. Furthermore, trading revenues within Platts and the index 30% Platts SNL business (~5% of firm-wide EBITDA) provide a hedge against volatility and stabilize revenues. 22% Risks to our Rating 19% 19% 20% 17% 17% 1) Cyclical downturn in issuance that offsets the strong refinancing pipelines 2) failure to 15% 14% integrate SNL and missing synergy targets 3) pricing regulation 4) market downturn in 12% 9% 9% indices that offsets organic growth and/or the counter-cyclical lift from trading volumes. 10% Attractively Valued Multiple Growth Levers & Scarcity Value of the Business We initiate our 2016-2018 estimates proforma for the sale of JD Power at $5.03, $5.74 0% and $6.61. Our $123 target price implies that shares can trade at 21x our 2017 estimates. 2011 2012 2013 2014 2015 Source: Company data, Credit Suisse estimates 1 SPGI Bull-Bear Scenario Implied TP: $123 Bull versus Bear Implied TP: Implied TP: $136 $96 Bull Case ($6.19 2017 EPS) Bear Case ($5.07 2017 EPS) CS View ($5.74 2017 EPS) Backstory 22x 2017 P/E 19x 2017 P/E 21x 2017 P/E SPGI has been a phenomenal stock, Issuance recovers from the early Issuance lower due to macro Issuance mixed due to macro outperforming the S&P 500 by 70% hitch in 2016; ratings revenue concerns; ratings revenue falls 0- concerns; ratings revenue grows over the past three years. Following grows mid-single digits for the 4% over the next two years. low-single digits 2016-2018. the divestiture of the lower-margin next two years. Ratings margins Ratings margins of 46%. Ratings margins of 47%. Education, Aviation Week and of 48%. Market Intelligence subscription Market Intelligence continues Construction businesses, the Market Intelligence grows mid- growth softer than expected strong subscription growth; SNL company is now a focused vendor of teens digits; SNL is effectively (mid-single digits); SNL is is effectively integrated EBITDA financial benchmarks, data & integrated, EBITDA synergies effectively integrated, EBITDA synergies realized and margins analytics. In conjunction with reduced realized and margins expand to synergies mostly realized and expand to 36% by 2018 legal costs, margins have expanded 37% by 2018 margins hover in the low 30’s nearly 900 bps since 2012, from Organic growth continues in S&P 31% to 40%. The company recently Asset appreciation bolsters In S&P DJI, asset price DJI, trading grows 3% a year, spent $2.2 billion to acquire leading strong organic growth, trading depreciation hits AuM, trading and overall revenues grow mid- financial data vendor SNL–a move volumes grow 4% a year, and volumes decline 2% a year, and to-high single digits annually initially met with skepticism, which overall revenues grow high single overall revenues grow low single Platts grows high single digits has since thawed as margins have digits annually digits annually and maintains mid-to-high-40’s expanded faster than expected Platts grows high single digits Platts grows mid single digits and margins within Market Intelligence. and maintains strong high-40’s posts margins in the mid-40’s Share count reduction of 6% margins Share count reduction of 5% Share count reduction of 7% Source: Company data, Credit Suisse estimates 2 Key Charts S&P a Top Global Credit Ratings Agency (CRA) SPGI Less Exposed to Issuance Downturn Due to More Stable Product Mix Shift (In percentage points Note: 2015 estimated) (2007 and 2015 ratings revenue mix by product in percentage points) 100% 2007 Gov t 2015 14% 15% 14% 15% 16% 17% 20% 22% 13% 16% 13% 13% Other 80% 19% 9% 40% 40% 35% 39% 40% 40% Fitch IG 60% 39% 39% 39% 34% 35% 35% 38% Struct 23% 32% 48% 44% 40% Moody's 21% 20% 40% 40% 40% 39% 40% 43% 42% 42% 40% 42% 40% 42% 42% Other S&P 6% 0% FIG HY 15% 2002 2004 2006 2008 2010 2012 2014 4% highly cyclical modestly cyclical less cyclical Market Intelligence–The Next Leg of the Story (Yr/yr revenue growth by quarter in percentage points) SNL Acquisition that Should Structurally Boost Market Intelligence Margins (Revenue in $ millions, mix of 2014 revenue by product, region and client in percentage points) 15% Financial Data & Analytics Global Risk Svcs Markets Intelligence $300 $10 $15 10% Gov t Struct 9% 12% 5% $2 HY 9% $200 21% 0% CAGR 2003-2015: 51% 21% FIG -5% IG 28% $100 42% 17% -10% Other 11% -15% $0 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2003 2005 2007 2009 2011 2013 2015 S&P DJI ETF AuM A Leading & Fast Growing Index Benchmark Oil Price has Minimal Impact on Platts’ Revenues Given Mission Critical Products (ETF AuM in $ trillions, share of AuM in percentage points; 2016 data as of March 31st) (Platts revenues in $ millions, avg price of oil in $ as stated on right axis) Other Nasdaq CRSP FTSE Russell MSCI Bloomberg S&P DJI $180 Platts revs Avg oil $120 $3,500 CAGR 2009-2016 $3,000 13% Industry: 16% 11% $150 $2,500 S&P: 19% $80 $2,000 12% $1,500 14% $120 $1,000 18% $40 $500 27% $90 $0 2009 2010 2011 2012 2013 2014 2015 2016 $60 $0 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 Source: Company data, SEC, Morningstar, Bloomberg, Thomson Reuters, Credit Suisse estimates 3 Table of Contents (Click on Wheel to Navigate Through Note) Capital Management and Company Overview & Financial Statements Executive Compensation Expense & Revenue Snapshot and S&P Ratings Mgmt. Guidance Risk Factors S&P Global & Valuation Market Intelligence Company History & S&P Dow Jones Indices Annotated Stock Chart S&P Global Platts 4 Company Overview & Executive Compensation SPGI Overview A Leading Provider of Benchmark Ratings, Indexing, Pricing, Data and Analytics S&P Global (SPGI) provides ratings, benchmarks, data, and analytics services for the capital SPGI Revenue and Operating Margin Progression and commodity markets.
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