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Morningstar | S&P Benefits From Advancing Market Intelligence Business; FVE Increased to $184 per Share. See Updated Analyst Note from 26 Jul 2018

Wide-moat rated S&P Global finished the second quarter in line with our full-year expectations. During the period, the company grew revenue by 6.6% (when compared with the previous year's second quarter), despite global issuance declining 5% year over year. While issuance is undoubtedly an important long-term driver of revenues, we’ll remind investors that S&P's revenue model has changed since the financial crisis. Increasingly the company makes money from surveillance subscription fees as opposed to fees tied to issuance. Despite little-to-no growth in ratings transaction revenue, non-transaction fees were up 7% during the second quarter. That said, growth from market intelligence was the biggest drive of the revenue expansion.

For the quarter, GAAP operating margins were 41.8%, representing a decline 360 basis points from the first three months of this year. Almost all of this was driven by $73 million increase in litigation reserves resulting from the 2008-09 financial crisis. Excluding this charge, operating margins would have been 46.3%, more than 90 basis points higher than the previous quarter. We've increased our fair value estimate to $184 per share from $173. While some of this change is due to an increase in the time value of money, we also assume higher rates of return on incremental capital longer term.

Understandably, investors spend a lot of time following issuance each quarter, but we think the company's progress in market intelligence deserves more attention. For the quarter, market intelligence saw a 13% increase in desktop users. Currently, FactSet and Thomson Reuters, S&P's closest publicly traded competitors, are not seeing similar levels of growth in desktop solutions (and, in our view, are likely losing customers to S&P). While market intelligence is S&P's lowest margin business right now, we think there is room to improve margins over time (some of which will become evident as enterprise contracts are renewed at higher prices).

As for S&P's indexes business, the division increased revenue 13.6% during the second quarter when looked at on a year-over-year basis, but its top line was actually down slightly on a sequential basis. We'd encourage investors to look more at the quarter-to-quarter growth figures, because much of the year-over-year revenue growth was due to a surge in index flows last year. So far this year, period-end ETF assets under management declined 1.3% during the first quarter, and while up more than 4% sequentially during the second quarter are facing some market-related headwinds. With index levels at elevated levels, we'd note that S&P's AUM growth is now likely to be far more dependent on market performance than asset flows.