After an 86% rise since the March 23 lows of this year, at the current price of around $360 per share we believe S&P Global stock (NYSE: SPGI) has reached its near-term potential. S&P Global, a provider of credit ratings, benchmarks, analytics, and data to the capital and commodity markets, has seen its stock rally from $192 to $360 off the recent bottom compared to the S&P which moved around 55%. The stock is leading the overall markets by a margin, as investors are positive about the growth in its credit rating business – S&P Global is a market leader in the credit rating space. Notably, the stock market has also seen some negative movement since September 2nd due to a stint of profit-booking after a strong run – SPGI’s stock is down 6%. Despite this, the stock is still up 30% from levels seen at the end of 2019.
S&P Global’s stock has surpassed the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower than last year.
Some of the rise over the last 2 years could be attributed to roughly 11% growth seen in S&P Global’s revenues from FY 2017 to FY 2019, which translated into a growth of 42% in the net income. The net income figure in FY 2017 was affected due to the one-time impact of the U.S Tax Act, leading to somewhat higher net income growth than revenues over 2017-2019.
While the company has seen modest revenue growth over FY 2017-19, its P/E multiple has also seen some increase. We believe the stock is unlikely to see a significant upside after the recent rally and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard What Factors Drove 116% Change in S&P Global Stock Between FY 2017 And Now? has the underlying numbers.
S&P Global’s P/E multiple changed from 28x in FY 2017 to 31x in FY 2019. While the company’s P/E is around 41x now, there is some downside risk when the current P/E is compared to levels seen in the past years – P/E of just above 31x at the end of FY 2019 and around 28x at the end of FY 2017.
So what’s the likely trigger and timing for the downside?
S&P Global is a leading provider of credit ratings, benchmarks, analytics, and data to the capital and commodity markets throughout the world. The company generates the biggest chunk of its revenues from the credit rating business which is directly tied to the amount of debt issuance. The company’s rating business has benefited from higher bond issuance in the first two quarters, leading to growth in total revenues. However, the segment revenues are likely to be down the rest of the year due to a negative GDP scenario, leading to a drop in Q3 and Q4 revenues on a year-on-year basis. This is likely to pressure S&P Global’s stock price.
However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S to buoy market expectations. Following the Fed stimulus — which helped to set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results. Though market sentiment can be fickle, and evidence of a sustained uptick in new cases could spook investors once again.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.