Evaluating S&P Global: Is It a Good Buy Below $550?

S&P Global (SPGI) is a significant player in the financial sector, with a market capitalization of $162 billion. You might not recognize the name, as it does not engage directly with consumers; however, it plays an essential role in our financial system.

S&P Global is crucial because it provides credit ratings and a variety of financial information that aid in the smooth operation of capital markets. Over the past five years, its stock has risen by an impressive 86%.

With the stock now trading below $550, it raises an important question: Should investors consider buying S&P Global shares?

Consistent Growth

In 2024, S&P Global reported a 14% year-over-year increase in revenue, totaling $14.2 billion. A standout performance came from its Ratings segment, which saw a remarkable 31% sales growth. The Market Intelligence division, its most significant revenue source, also contributed with a 6% increase.

Notably, the company's revenue last year was 178% higher compared to 2014. Moreover, S&P Global has enjoyed continuous growth, not reporting a single revenue decline in the last ten years, and it has achieved five consecutive years of double-digit revenue growth since 2019.

This sustained growth showcases that S&P Global is benefiting from a favorable macroeconomic environment. Factors such as GDP growth, an increasing M2 money supply, and rising asset prices drive a higher demand for its services. The company appears to have a robust position that is unlikely to weaken, making it less risky for potential investors.

Equally impressive is the company’s profitability. Last year, S&P Global achieved an adjusted operating margin of 49%, and executives anticipate maintaining a similar margin in 2025. The company’s low capital expenditure allows it to generate significant free cash flow, which supports its dividends and share buyback programs.

Competitive Edge

S&P Global also benefits from a substantial economic moat, meaning it has established competitive advantages that protect its business position. One critical aspect is the network effect. Corporations seeking to raise debt prefer obtaining a credit rating from S&P Global due to its broad acceptance as a standard in the industry. A lack of a rating could lead to increased interest costs and diminished demand from investors.

Likewise, investors often prefer to allocate capital to corporate bonds that carry ratings from S&P Global, as it helps mitigate their risk.

The company’s products and services are deeply embedded in the financial system, and it has built strong relationships with key stakeholders, making it nearly impossible for new competitors to gain a foothold in the market. This trust is challenging to replicate and solidifies S&P Global’s market position.

Investment Potential

While the market recognizes the investment potential of S&P Global, the stock seldom trades at a discount. Currently, its price-to-earnings (P/E) ratio stands at 42.6, which is about 10% higher than its average over the past decade.

Analysts forecast that S&P Global’s earnings per share (EPS) will grow at a compound annual rate of 11% from 2024 to 2027. This projection seems reasonable and does not suggest excessively rapid growth.

However, at its current valuation, there is a lack of confidence that S&P Global will outperform the broader S&P 500 index over the next five years. Even taking into account its performance in the past, it has not outperformed the benchmark over the last five years. This trend could be concerning for potential investors.

A more attractive investment opportunity would be presented with a P/E ratio closer to 30, making the stock look more enticing, given the company's strong growth and profitability.

Overall, shares of S&P Global may not represent a buy below $550 at this time; however, they could become more appealing if the price reflects a more favorable valuation.

Investing, Stock, Finance