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Morningstar | S&P's Non-Ratings Businesses Offsetting Weakness in Ratings

Wide-moat S&P Global’s fourth quarter reflects the headwinds facing bond issuance as higher interest rates and slower economic growth remained a weight on the company’s top-line growth. For the period, S&P generated revenue of $1.5 billion, about a 3% year-over-year decline. This doesn’t really worry us too much as we suspect last year’s fourth quarter benefited from people timing rate increases rushing to issue debt to lock in lower rates. Though Ratings revenue fell 16% from the previous year, S&P’s other businesses performed exceptionally well. Market Intelligence, Platts, and Indices grew revenue by 8%, 7%, and 13%, respectively. S&P’s smaller segments, that collectively account for more than 50% of S&P’s profits, grew operating income by more than 23% from the previous year. Yes, bond issuance is of outsized importance to S&P, but investors shouldn’t sleep on these smaller segments that have sizable moats and continue to grow rapidly. We’ll be updating our model to reflect full-year 2018 results and continued growth of S&P’s non-ratings segments that have outperformed our expectations. That said, we only expect modest increases to our fair value estimate of $179 per share.

During the quarter, global bond issuance decreased 6% while high-yield issuance dropped 40%. Management is now forecasting that 2019 global issuance will decrease by less than 1%. If global bond issuance decreases by only 1%, a lot of concerns regarding the company’s top-line revenue should dissipate. In addition, management forecasts global corporate high-yield debt maturities will increase from less than $200 billion to nearly $700 billion between 2019 and 2023. Though timing of issuance and refinancing often depends on expectations for rate increases, we think S&P’s pricing power within ratings should help offset most, if not all, near-term pressure on Ratings revenue.

In addition, management introduced 2019 guidance forecasting top-line revenue growth in the midsingle digits and diluted EPS around $8.60 per share, implying earning per share growth of around 11%. Given S&P’s non-ratings businesses are growing at rates in the mid- to upper-teens, we think this is somewhat of a low bar. If rates remain stable, it may cause some pull forward in refinancing activity that could push 2019 revenue growth to the upper single digits.