Chit Chat Stocks - S&P Global: A Capital-Light Compounder At the Heart of International Finance (Ticker: SPGI)

Episode Date: April 9, 2025

On this episode of Chit Chat Stocks, Ryan gives a pitch on S&P Global (ticker: SPGI), one of the highest quality businesses in the world. We discuss: (03:33) Historical Overview of S&P Global (11:44) Business Segments of S&P Global (12:47) The Ratings Segment and Its Moat (18:52) Software and Market Intelligence (24:46) Commodities and Mobility Segments (30:59) Evaluating S&P Global's Valuation (32:17) Understanding the S&P 500 Index (34:25) S&P Global's Revenue Growth and Margins (37:25) Corporate Culture and Management Structure (43:59) Assessing the Moat of S&P Global (47:31) Valuation and Financial Projections ***************************************************** JOIN OUR NEWSLETTER AND FREE CHAT COMMUNITY: https://chitchatstocks.substack.com/  ********************************************************************* Chit Chat Stocks is presented by Interactive Brokers. Get professional pricing, global access, and premier technology with the best brokerage for investors today:  https://www.interactivebrokers.com/  Interactive Brokers is a member of SIPC.  ********************************************************************* FinChat.io is the complete stock research platform for fundamental investors. With its beautiful design and institutional-quality data, FinChat is incredibly powerful and easy to use. Use our LINK and get 15% off any premium plan: ⁠finchat.io/chitchat  ********************************************************************* Bluechippers Club is a tight-knit community of stock focused investors. Members share ideas, participate in weekly calls, and compete in portfolio competitions. To join, go to ⁠Blue Chippers and apply! Link: ⁠https://bluechippersclub.com/ ********************************************************************* Disclosure: Chit Chat Stocks hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Stocks. Before we get to this episode, we want to talk about our friends at Interactive Brokers. Interactive Brokers is the professional's gateway to the world's markets. Interactive Brokers offers commissions starting at $0 on U.S. listed stocks and ETFs with low commissions on other products, and there are no added spreads, ticket charges, or account minimums. Clients in over 200 countries and territories trade stocks, options, futures, currencies, bonds, funds, and more on 160 global markets from a single unified platform. Clients earn interest rates of up to 3.83%

on instantly available cash and pay margin rates up to 53% lower than the industry. You can also earn extra income on your lendable shares and IBKR's powerful award-winning trading platforms help every level investor succeed from beginner to advanced on mobile web and desktop. When placing your money with a broker, go with a broker you can trust.

Make sure your broker is secure and can endure through good and bad times. We use IBKR here at Chitchat Stocks for their best in class international coverage. And you can too, by heading on over to IBKR.com. Interactive Brokers is a member of SIPC. Welcome to Chitchat Stocks. On this show, hosts Ryan Henderson and Brett Schaefer analyze businesses and riff on the world of investing. As a quick reminder, Chitchat Stocks is a CCM Media Group podcast. Anything discussed on Chitchat Stocks by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this

episode. Welcome in. This is another edition of the Chitchat Stocks podcast. My name is Brett Schaefer and joined, as always, by Ryan Henderson. We had another stock research episode last, well, not last week. A few weeks ago, I covered NewBank, otherwise known as NewHoldings. Go check that one out if you're interested. Now it's Ryan's turn for this month, and he is doing, as the title is going to be, S&P Global, a capital-light compounder at the heart of finance. It's one of the largest businesses in the world. 163, I think, billion-dollar market cap. Ratings agencies, indices, software revenue. It's a whole hodgepodge of high-quality... Well, we'll debate if they're high-quality businesses. And I may be getting too much into the weeds during this intro,

but I'm going to let Ryan introduce the episode. But first, a few housekeeping items. One, if you're listening to this podcast, wherever it is, just know you can listen to it on YouTube, Spotify, or Apple Podcasts. And if you enjoyed this episode, give us a review on Spotify or Apple Podcasts. Lastly, if you want more information about S&P Global, charts, FinChat charts, all that good stuff, Ryan's analysis from this episode in the 10-page or so report he prepared for his show notes, subscribe to our free newsletter on Substack. The link will be in our show notes on the podcast or to search Chit Chat Stocks Podcast on Substack or Google. Okay. I'm talking

too much, Ryan. Let's get right into it. Introduce S&P Global for the listeners. Yeah. Even if you've never studied the business, you've likely heard the S&P name in some way. the business has been around for more than a hundred years. It is a critical part of the financial world and has generated outstanding returns for investors over the last three decades. To put some numbers on it, since 1993, S&P Global has earned investors about 16% annualized total returns. For context, the S&P 500, yes, that belongs to them. And we'll talk about the division later in the episode, they've earned about 10% a year over that time frame. So $10,000 invested in S&P Global would have earned investors $1.1 million, whereas the index

would have earned just over $200,000. So phenomenal returns over the last three decades. That's a hunter-bagger, right? Yes, that is correct. Hunter-bagger in 30 years. Not bad. For this episode, we're going to look at each segment of the business, assess the moats within their various industries, and try to figure out whether or not their success thus far can continue, and if so, what that means for shareholders. Okay. And this is one of the oldest businesses in the entire country. It's one of those where

it's almost as old as the United States itself. Talk to the listeners about how S&P Global became the conglomerate, maybe. Conglomerate might be the wrong word, but I think that probably fits here. how they came from just a small business, started in the 1800s, to the S&P Global of 2025. Yeah. To paint a picture of how deeply embedded S&P Global is in the world of finance, I have to take listeners back in time. So S&P's roots date all the way back to 1860. Yes, that's 1860 165 years ago when i named a man named henry varnum poor published a book called history of the railroads and canals of the united states just hilarious what books were named back then there was there was no you didn't have to get too tricky with it yeah no creative agencies

yeah i don't think advertising or not advertising promotional people pr people they weren't even a thing you just kind of went i wrote this i'm gonna call it railroads and canals good okay that's what it's about railroads and canals yeah whatever it was about that was the name i mean it was the same for like companies this is standard oil uh just so many hilarious names back in the day anyways he wrote this book with the hope of providing data to investors on the booming railroad industry keep in mind this was at the time when railroads were as i just said booming and there was a whole bunch of investor excitement and enthusiasm trying to get in on any sort of early stage railroads, that kind of thing. Two years later, Henry Poore, as he was known, was appointed

commissioner for the Union Pacific Railroad. That was a designation that was given out by the US government. So it kind of goes to show how important the Union Pacific was. This eventually led to poor creating the company's pores publishing is what it was called which would produce a yearly manual of data on the railroads so sort of same business model as today but on a much today it's obviously much larger but they are they were basically that was kind of the roots of what you look at maybe cap iq like today like you're they were publishing annual data um every year for investors to, I think they subscribed to it. So it was the early days subscription model. So that's the pores part of S&P. As for the standard, the S, in 1906, a man named Luther

Lee Blake founded the Standard Statistics Bureau to provide current information on non-railroad industries. The two financial data providers want to end up coming together for another 30 years. So in the meantime, the two continued to build out their businesses in different ways. In 1916, Poors Publishing issued its first ever credit rating, providing investors forward-looking data on issuers' creditworthiness. And six years later, Standard followed suit. So both ran similar models. They were acquiring financial data on companies, selling it to subscribers, and using that

data to help inform their credit assessments. And in 1941, as the Great Depression was coming to a close, the two companies merged, creating what we know today as Standard and Poor's. The two companies were both already relevant in their respective markets, but coming together made them that much more of a force in the financial industry and that much more relevant to the investment industry overall. And in 1957, they introduced the S&P 500 Index. It is funny how that has become the most recognized index today, yet it was actually introduced more than 70 years after Charles Dow invented his stock index. Yeah, and rightfully so. The Dow has some issues. You know, weighting is based on the actual price. Come on.

Yeah, and the Dow index initially was 11 companies. So yeah, talk about some concentration risk. Anyways, I'll skip over some of the remaining history as it has sort of been 60 plus years of acquisitions and spinoffs, but I'll just highlight some of the most relevant pieces here. In 1964, they introduced Compustat. That was a database of thousands of companies that would eventually become sort of the genesis of CapIQ. In 1966, S&P was acquired by McGraw-Hill, where it would remain for 47 years. This was actually – it wasn't until 2013 that they were actually – well, they technically weren't even spun out of McGraw-Hill. They were the remaining company of McGraw-Hill. But then in 1975, the SEC began recognizing companies with the term NRSRO, so Nationally Recognized Statistical Ratings Organization, which S&P became one of. So they got that designation, and that kind of helped them create what today is a massive regulatory moat. So this is essentially a license that they are gifted to by the government? Do they have to obtain this every year or is it something that they permanently have this? I don't know if there's some sort of a renewal process.

The SEC just gave certain companies the designation. I assume you had to apply for it. I believe there's 10 companies globally that have it now. But in the early days, I think they were one of the first ones to get it, which kind of gave them the early reputational advantage that we'll talk about in the ratings business, which really helps. ultimately companies want the cheapest rate they can get. They want investors to buy their bonds. If you're going to issue bonds, you want someone to say, Hey, they're really credit worthy. And S&P was one of the first ones to do that with a really valuable designation. So that kind of gave them that early advantage. And it's just built on, it's kind of been a self-reinforcing advantage

ever since. 2013 McGraw-Hill spun out its education segment and renamed the remaining financial data business, S&P Global. So the S&P Global, you know, today was basically available in financial markets at starting in 2013. You could have bought McGraw Hill overall all the way back. I think in the, I think it's been public for like a long, long time. But some of the total return data we get all the way back to 1990, I think. Anyways, last thing I'll mention 2022 S&P merged with IHS market, which had actually quite a similar model, a lot of market data, a lot of different data businesses, automotive data as well, which we'll talk about in a sec in an all stock deal worth $44 billion. It was trading that price tag was basically 28 times

EBITDA. So huge merger, huge deal transformative in terms of the financial statements for S&P. And we'll get into the rest here in a second. Okay. Yeah. It's a good overview. I hope the listeners enjoyed as well. I was always curious where Standard & Poor's actually came from. Turns out the guy's last name was literally Poor's. So that's a little bit of a wild card. I didn't think that was going to be the reason why it was called Standard & Poor's. But let's get into the business today.

What are the various segments? It looks like with our friends in FinChat, they have divided them into five different revenue segments. But you're going to try to boil it down for the listeners and the key KPIs that everyone needs to follow. Yeah. So today, S&P Global is an amalgamation of several different data providers, along with being one of two companies that runs essentially a duopoly in the credit ratings industry. S&P themselves, they break their business into five segments. I'm going to boil it down basically to three. There's ratings, software, and indices. So I'm going to kick things

off with ratings. But yes, if you want any of the segment level data, they've got five. It's mobility indices, commodities, ratings, market intelligence. I grouped three of those into software. They're all available on FinChat. You can get the revenue and operating profit for each segment there. But let's talk ratings. When I think the term regulatory moat, this is one of the first businesses I think of. S&P Global essentially runs a toll road on global bond issuance. Between them, Moody's, and Fitch, they issued 94.2% of all ratings in the US in 2024, which is just an astounding figure. Now, keep in mind, companies, when they issue a bond, they get multiple different ratings from various credit providers. So it's not impossible for

multiple companies to have 90% market share. So anyways, for anyone unfamiliar with the process, I'll run through a quick example. Let's say you run a public company. You want to raise some money to invest in a project. You could theoretically, and to do so, you're going to issue a bond. You could theoretically not get that bond rated, but that means many investors would not be allowed to buy it. They literally have a mandate at their investment firm that says if it's not rated AAA or whatever, you can't buy it. And if it's not rated at all, you definitely can't buy it. And you'd also probably have to pay a really high interest rate for doing so. So pretty much everyone goes to an NRSRO, which we just talked about, a certified rating organization, most

likely Moody's or S&P, and you ask them to initiate a rating on your bond. They'd have analysts pour over your numbers and provide you a rating. And now you can go out and market that and get people to buy that bond and say, here's the rating that we have from S&P. Here's the rating that we have from Moody's. And then S&P not only earns a fee for this initiation, but it also earns an ongoing fee for quote unquote surveillance, which I guess makes sense. Obviously the credit worthiness of a business can change over time. And since the primary expense here is SG&A, sales general and administrative expenses to basically maintain the staff that's required to survey millions of ratings. The margins are quite high since that's all primarily fixed costs.

Over the last year, they had 62% operating margins in their ratings division. Not only does this segment actually help inform investors, but S&P also is protected here by a reputational moat and it's not necessarily like like they have a great reputation but also it is basically liability uh delegation i guess it may be the word the rating agencies offer a layer of accountability for institutional investors in other words when an asset manager or pension fund loses money on a credit investment they can always say hey well it was s&p rated it had this you know it had such a nice rating. It's S&P's fault, not mine. So the asset managers, ultimately the people buying those bonds need that level of accountability. And that has been a self-reinforcing

advantage for a long time. Yeah. And you, this reputational moat, which I do agree with, is so strong that even though in 2008, they were maybe the most guilty party in causing a global economic collapse that this reputation has stayed intact and moody's and s&p global really their market share didn't change yeah so if they can survive basically basically being uh criminal acts yeah yeah criminals uh i mean that if that doesn't show the moat i don't know what does and they've grown since like they've grown a ton since and it also goes to show that's not just corporate bonds they're grading right they're they're think about all the different derivatives out there or sorry the package securities credit default swaps back

or not sorry uh collateralized debt obligations which was the or mortgage-backed securities i should say um anytime you're packaging and securitizing something which banks love to do it needs a rating and so that that leads to more volume for s&p municipalities they issue bonds they need a rating corporates they issue bonds all that stuff so sovereign governments yeah sovereign governments uh so even though software is technically the largest segment on a revenue basis for s&p global ratings accounts for the largest chunk of profits at roughly 45 percent of total operating profits. And if you look at the financials over the last – going all the way back to December 2012, ratings revenue has grown at just under 7% annually. They've recovered since

their 2022 high. So obviously, when interest rates spiked up, there was way less issuances from – especially at the corporate level. And so revenues declined. There was less initiation revenue. And it's since recovered already, which I think is as long as rates stay within a normal range and they don't spike up again, or even if they drop, you should expect issuances to continue to rise over time. So it's been quite a good business for them. 7% roughly revenue CAGR and 11% operating income CAGR. Yeah. And maybe even a simpler way to look at it, if global GDP grows, you should see credit and loans grow along with that. And as long as S&P Global maintains that pricing power,

they should probably grow at GDP plus whatever that pricing power is. Let's get to the second segment, software. You're going to go through it, but just so the listeners understand, is this part of what they acquired or merged with in 2022, or is that the other segment? Partly. Some of this stuff existed before, but they had they did acquire a number of software slash data businesses that are now

lumped in here so software as i call it combines three segments for them market intelligence commodity insights and mobility i'm going to go one by one the biggest focus here will be market intelligence and it's probably what a lot of people recognize s&p for is that market data market software. And overall, I'll just say S&P seems to have made a general push towards diversifying its revenue streams over the last decade, because I think they wanted to get away from some of the ratings cyclicality. They wanted to have more recurring subscription type of revenue, which has been sort of the impetus for them acquiring so many software businesses. let's start with market intelligence this is the largest part of software and there's sort of three

different segments that i think are relevant to the business so the first one is cap iq and this is cap iq for customers so think think you're running a hedge fund you need a data platform for all your analysts so you buy three five ten however many seats to get access to all the fundamental data and analytics for global equities and bonds. If you've ever heard of or looked up CapIQ, you're familiar with the platform. It's basically access to a database, more or less. There's also a newsfeed. They've layered on a lot of different stuff in there, but that's the basics of it. And I'll talk about how they get that data here in a second. They don't disclose pricing, but I have heard seats typically cost $25,000 to $30,000 a year,

Which is why when you're hiring an analyst at a fund or an investment bank or something like that, you not only have to calculate their salary, but you have to tack on typically $25,000 or $30,000 a year for S&P CapIQ or Bloomberg Terminal. Bloomberg Terminal is slightly higher price point, I think, but CapIQ is kind of just under it. The second part of that, the second way they earn money is all that data that they've collected on CapIQ, they sell it. They license it to other aggregators. For example, an aggregator like FinChat, our friend and sponsor and my employer, they would partner with them, license the data, and those companies will buy data from them. Third is they actually sell the credit ratings data that their ratings division provides. So if you wanted access to how those ratings were determined, all the credit worthiness, the steps, hoops they went through to get there, customers can subscribe to that as well. Now, before we move on, I'm going to give a little bit of background on the financial

data space overall, as I've gained a bit of a unique perspective on this while working at FinChat. So there are essentially three giants in the financial data industry today, S&P, Faxet, and Refinitiv, which is owned by the London Stock Exchange. There's also Bloomberg, but Bloomberg does not sell data. They're kind of in their own world. I mean, they are based – if they were public, I would love to look at their financials because that is a phenomenal business that's very insulated. They have a chat functionality.

It's not just research and data. It's execution, everything. It's kind of a whole gamut. It's more banks, right, as opposed to CapIQ is probably more investment funds, although they overlap a bit. Yeah. Yeah, I think that's fair. There's definitely some customer overlap there, but yeah, that's probably a fair categorization. Now, each of these businesses, they're built on the data, right?

They have these giant data repositories of global equities and bonds. Each of these businesses have thousands of employees abroad where their sole role is manual data entry. For example, S&P Global, who primarily does business in the US and North America, has 58% of their employees. that's more than 20,000 people in Asia. Those teams are literally pulling numbers from filings as soon as they're available and putting them into the software that ultimately becomes CapIQ. That is their job's manual data entry. There's a lot of data analysts in Southeast Asia and different Asian markets. So it's cheaper to have teams there. And so that's just to kind of paint the picture. That's where I guess the moat is. They're going in. It's very hard for people

to automate this process. You have to go in. Some companies file, like in India, some companies take photocopies of their financial statements and post them online. It's very hard to access and aggregate all this. So there's very much a manual process there. And that's kind of the moat, I guess, moat or advantage or what they've built in the back end to help acquire that data. Now, I do think this is a pretty solid business overall. It's one of those sticky businesses that has been around for a long time and their customers tend to be pretty reluctant to switch. And S&P has certainly flexed their pricing power over the years. I mean, $25,000 to $30,000 a seat is not – it's a huge price. However, due to some of the competitive

dynamics, market intelligence really does not grow very quickly. This business has historically grown revenue at around 6% a year, both pre and post merger. And there's some inorganic elements to that. They're making small bolt-on software acquisitions every year. I mean, they've made 11 in the last three years. So I can't imagine, they don't really break out this data, but I can't imagine their user growth has grown all that quickly. And I would guess that 6% annual revenue growth is primarily made up of price increases all right let's roll into commodities yeah so this used to be called plats and like market intelligence uh the roots here date back to literally a century ago it was basically like the turn of the 19th century am i saying that

18th 20th century the 20th century turn of the 20th century i guess every person that decided to collect data, just built a billion dollar business over the coming 100 years. And this is actually a very similar business. So Platts is the leading independent provider of information and benchmark prices for commodity and energy markets. It makes money in much the same way that market intelligence does. It sells subscriptions to its software, it licenses its data to other businesses. And then when they acquired IHS, IHS had some other commodity type businesses, like their upstream business, which provides technical information and expertise on oil and gas wells and stuff like that. So some of the growth there is inorganic.

Basically, there's the pre-merger, post-merger. Post-merger looks like you have a lot more revenue, but obviously there's lumping in new businesses there. Like market intelligence, though, the segment is really sticky for the end customers. And once it's kind of embedded, Those data points are embedded in your process, whether you're like a business, whether you're just a customer relying on those data points, you're going to stick around for the most part. And there's been, I imagine, some pricing power flexed here as well, but growth itself isn't great. I saw some reports that said it was basically growing at around 5% a year, and that's kind of similar growth rate to the market intelligence side of things. The last part of the software that I'll mention here, and this is the smallest, is mobility. This was acquired in the IHS merger, and it's kind of a random one. This was basically IHS's transportation data, which is the leading provider of data for the auto industry. so tracking like oem production and sales rates across the globe what they think oem production

will look like next year that kind of thing if you've ever heard those car commercials it's an ihs top safety pick i don't know if that rings a bell for anyone that's referral yeah watch enough sports pops up there and you're about to say the carfax thing those commercials they'll drive you nuts maybe maybe that's the way they can cut costs get rid of those damn things yeah so people subscribe for that data, the IHS OEM production tracking data. But then they also have some other stuff in here like Carfax and some other smaller data businesses. Overall, this only accounts for 11% of total revenue for S&P. So I'm not going to spend a whole lot of time here. I wouldn't be surprised if this was eventually spun off just because it's not super related to their other

businesses. And they've been doing a little bit of spinoffs lately. Specifically mobility, not not the whole thing yes specifically mobility uh they recently spun off their engineering software business um so it kind of feels like it might be next one up to get maybe some sort of outside acquirer or something like that but yeah that's the software business it's in general in a nutshell i'd say it's old right it's been around for a long time this dates back to Compustat. It's data intensive. The hardest part is acquiring the data. That's where maybe the lack of competition has come from over time. And then they have a huge footprint with analysts and investment firms around the world. You ask any investment firm about CapIQ,

they will know what it is. It's pretty core to the investment world overall. So that's kind of a general description. I suspect this won't grow very quickly in the future. And I don't think that's too controversial of a statement, but I'll get more into that in my projections. Before we move on, we want to talk about Blue Chippers Club. Blue Chippers Club was started by two friends of ours with the goal of building a tight-knit community of stock-focused investors. Inside this community, everyone gets to share a breakdown of their portfolios, pitch stocks, receive feedback, and participate in weekly calls. I truly love this idea, and it's why we're promoting it here on the show. In fact, we are in this community ourselves and enjoy just how much value we get by collaborating with other investors. When I first got into investing, a role model of mine recommended that I build a network or

community of friends to bounce investing ideas off of, and Blue Chippers does just that. If you're interested in joining, head on over to bluechippersclub.com and hit apply. The link will be in the show notes. Okay. Do you think, Ryan, the $44 billion acquisition was a mistake? De-worsification? I don't know if I'd say it's a mistake. Maybe the price. Yeah. I mean, the one thing, when people pay you for data, there is definitely some synergies in buying a data business, right?

Like when S&P increases prices on its customers, like for example, they bought Visible Alpha last year, I think for half a billion dollars. visible alpha it's kind of this consortium of like analyst estimates for different like it's basically like if you're an analyst you can put your model in there and if you put your model in you get access to see other people's models that kind of thing and it's and then other people will subscribe to it they bought that they can theoretically now start to lump that in and increase prices on their overall kappa q first so now oh we're giving you more data all the stuff so So they have obviously that footprint, that massive footprint with the investment world. So I do think there's some synergies here.

And we've seen that probably. I imagine they've taken costs out of the business a bit over the two years. I haven't dissected the IHS acquisition too much. The integration happened, I think, a little over a year ago in terms of seeing it in the financial statements. But my gut says, yeah, they may have paid a little too much. Because it was a similar business. like a lot of sort of older legacy data software type businesses right okay let's keep things moving along the third segment you've outlined indices like the s&p 500 index and you call this

your favorite and most attractive part of the s&p global business overall why is that And what is this business made of? Yeah, when you hear the name S&P, I would imagine for most people, this is what you think of. This is the indices segment where they house the S&P 500 index. They also house the Dow Jones Industrial Average. So that belongs to them now. It's really – it's like technically it's still owned by another company, but there's this joint venture that says they operate the Dow Jones. anyways um this has been the fastest growing segment for them so they've had a 13 revenue

cagger since 2012 and it has the highest margins this is nearly 70 operating margins and i mean think about it like what's caught what is the cost of maintaining these it's so low okay and who pays who pays them is it like an etf yeah asset managers okay so if you're an asset manager or you're an etf shop like you you've got different etfs that you offer to investors and you want to offer one that tracks a particular index you have to pay licensing fees for it. These fees are called asset linked revenue by S&P Global, and they are dependent on the asset manager's AUM level. Over a quarter of all ETFs available are now linked to an S&P Dow Jones index. So the rise of passive investing, these guys are the primary

beneficiary, I'd say. Maybe there's some others probably as well. So S&P Global is the passive bubble people. This is like their number one villain. Oh, that's an entirely different investing conversation. But if S&P Global benefits, what I'm trying to say from like analyzing this business, they benefit from the growth of passive and the growth of ETFs. Correct. And it's interesting because there has been significant fee compression over the last – call it two decades because the large passive asset managers, so like BlackRock, Vanguard, that kind of thing, they've been forced to lower their own fees due to ETF competition and all that, which then they've had to pass through – they've had to basically tell S&P, we can't afford these fees either. And so there's been fee compression even at S&P's level. But despite all that, despite the fee pressure, S&P has continued to grow revenue at I think 12% a year over the last decade.

So it's really quite impressive, the growth they've been able to put up despite all this pricing pressure. I mean, they are the gold standard for benchmarks in the investment world. These indexes have been around for 100 years or longer, and I see no reason why they won't continue to grow into the future, especially because the S&P 500 is a reasonable index. Like there maybe would have been some cause for concern about the Dow, given that there's some like structural flaws. But the S&P – Got to get with the times. Yeah, the risk here is that global equity markets collapse. That would impact their asset-linked fees. I mean that obviously is a risk for everyone, but obviously it's somewhat market dependent. So there would be some risk there.

Yeah, no, I think this is a wonderful business. It costs like nothing to maintain and revenue just grows on its own. Yeah, I'm seeing these charts again. The revenue segments is a perfect – like these type of companies that have various revenue segments, it's a perfect reason to use our friends at FinChat. Use our link, finchat.io slash chitchat. Get 15% off any paid plan. I'm looking at the charts here. They're going to be included in the newsletter.

What is that? 67 68 operating margin for this business that's maybe the only other company is evolution that i've seen a higher figure on that one of the most profitable businesses in the entire world yeah how many companies out there do you know that have multiple major segments like major billion two billion dollar revenue segments that have 70 operating margins and comp no one can compete with them like that's that's why they have they've been able to sustain these operating margins i would imagine if you worked in the s&p index division like that's you should ask for they are looking for ways to keep their operating margins below 70 percent so it doesn't attract

regulatory scrutiny yeah one well i guess it's not a thing anymore well who knows what will happen But ESG, I heard, was a beneficiary for them, too, because they could charge higher fees for any ESG-linked stuff. But maybe that's not something they're talking about publicly anymore for fear of backlash. But you talk about these 60% margin businesses, Ryan, the ratings and the indexes, indices. That's kind of why I think, and I get your argument on the data, but it's kind of why I think that they diversified a bit with those acquisitions. although it's a dangerous word uh synergies they they could be they could be helped out all right yeah who runs this company today ryan assuming it's not the founders as they're dead uh have been passed away for a long time now do we have some mercenary ceos who makes up this company

what's their type of after you researched them looked at the proxy statement what did you take away from their corporate culture yeah it's it's a bit tough just because like a business like this ratings it's been around for 100 years indexes been around for i guess 70 years dow jones has been around for more than 100 it's kind of hard to know what sort of an impact the managers are having on the financial results um i'll go i'll go through management first and then we can talk through maybe some of the flaws in the proxy statement. The CEO is Martina Chung. She was named CEO on January 1st, 2024. Prior to Martina, Doug Peterson was the CEO for nearly a decade. I was a little bit worried that we were going to have some CEO every five years type of situation.

Doesn't seem to be the case. So far, in general, the managers have tended to be there for a pretty long time. And management is paid on three metrics. The first two dictate short-term compensation or short-term incentives. And the third one is the long-term incentive comp metric. So the first two are adjusted revenue and adjusted EBITDA margin. Sorry, adjusted EBITDA margin. We'll talk about some of the flaws here in a second. And then the third metric is adjusted, well, it's non-GAAP ICP adjusted earnings per share. I don't love these because the primary reason is it incentivizes acquisitions and guess what they do a ton of acquisitions over the last three years they've acquired 11 companies and these are not small deals let's take a look at

the reported numbers versus the numbers they get paid on for 2024 they reported non-gap icp adjusted earnings per share of 16.23 which is what they get paid on their gap earnings per share was 12.35 So their adjusted numbers are 31% higher. And guess what the biggest adjustment is there? You guessed it, listeners. $3.63 per share, $3.63 in deal-related amortization. So they're amortizing out or they're adjusting out the amortizations of their acquisitions. I don't love this. The one thing I do appreciate here is that they have denominators in their most important metric, which at least helps them have to care about the amount of shares outstanding. In general, you want a denominator in the proxy statement because if you're just looking for nominal figures like top line growth or whatever, you can do that at this expense of shareholders. So they do have to have some shareholder alignment.

But yeah, there's a flaw in the proxy statement. Yeah, yeah. This is one of those reading the proxy can seem boring, but really, we only look at a few things when at this document that can be 70, 100 pages long. And this is the key thing we're looking at is what is management incentivized to do? Because again, say the Charlie Munger quote, that's usually what they are going to do. And the fact that a lot of companies such as S&P Global will make acquisitions, or they can do this in other ways as well, and then take out the cost from the acquisition when calculating their adjusted earnings numbers, it makes it seem like when they're talking to Wall Street, talking to you as an investor, oh, our earnings are growing. When actually the take-home earnings, what you could earn as the owner of this business in free cash flow, owner earnings, whatever you calculate it as, it's nowhere near that level.

So, yeah, it just doesn't align over the long term. And maybe one of the downsides of this stock is that these businesses, the underlying business is so strong that they're never going to have the opportunity to have an activist come in and actually right size and realign the management team of shareholders. Because no matter how bad these management, I don't know how good or bad this management team is, but if you get a bad manager in there, these super high quality businesses can mask a ton of flaws. yeah and it's not like like they've seen i mean this business gushes cash so don't get me wrong it's not like they're just like totally faulty earnings and they're misleading investors you can just track free cash flow per share i just find it a little bit pointless for them to be getting paid on some of these metrics so anyways like i said earlier this is a business This was such a wide moat, especially in the ratings and indices that it's really not – like it's hard to know how much of the success of the business comes from good management versus just a really wide moat and advantageous markets.

So what I can say is I have a bit of an issue with the fact that not only do they adjust out the amortization of the acquisitions, but it feels a bit like they treat acquisitions as the solutions to their problems. So growth is disappearing in software. Well, let's just buy more software companies. There's a lapse in our data. Let's just buy whatever the data provider is for it. First of all, you incentivize companies to build businesses that could be acquired by you because you're known as an acquisition candidate and you pay premiums for a lot of these data businesses. So yeah, the acquisitions is frustrating because it also makes it tough to understand their organic growth because they don't break it out. KPI data. For example, you want to see Amazon's revenue from advertising? FinChat's got it. How about Netflix's paying subscribers by region? Yep, they've got that too. And they recently added custom metrics so that you can build your own formulas to track the numbers that matter most to you. So head on over to FinChat.io slash chitchat. All new users automatically get two weeks of FinChat Pro for free. But if you want to extend to any paid plans, our link will get you

15% off. That is finchat.io slash chitchat. Link will be in the show notes. Okay. So the corporate culture, the acquisitions, the adjusted figures, that's probably the biggest red flag for this business so far. Let's move into another section, something that we think is important. The Buffett question, the one that he talks about with Todd Combs that people have used as a metric, I think, over the last few years, ever since that came out. And it's the question of whether a moat will be the same, worse, or better five years from now. Ryan, what are your thoughts for S&P Global? Five years in the future, 2030, wider moat, weaker moat, same moat. I think there'll be probably a similar massive moat for especially the ratings and

indices businesses. But with software now being the bulk of the revenue, I'd have a hard time saying that S&P's moat overall is going to be bigger in five years. Obviously, still very advantaged, pretty wide moat. But part of the reason I say that is I think we're beginning to see some pressure on its financial data slash software business. Obviously, I'm a little biased here because as I've said before, I work at FinChat, which is another fundamental data platform, but we actually saw some questions around this during the latest conference call. So an analyst asked, said, you said in your prepared remarks, you're experiencing a highly competitive environment and elevated price sensitivity in market intelligence. I was

just hoping to get a little bit of color on that. Are there any specific areas of market intelligence seeing more competition? And previously, I know it is always a competitive space. Are you seeing sort of startups or large vendors more competing on price or just coming into that market. They've attracted a lot of competition over the years, partly because they charge a really high amount and it's made for sort of a lucrative market if you can come in and be a low cost provider in some aspects of their businesses. And I think we're starting to see some of that pricing pressure play out. It doesn't mean they're losing users. I just think you're going to get limited user growth. Maybe on the edges,

you'll lose some but it's becoming more competitive across the board and you know when you charge twenty five thousand to thirty thousand dollars a seat not only is it hard to add more users because companies can't afford it uh it potentially makes people look for alternatives so i would say the software business i think i think it's still a good business but i don't think it will have a bigger moat in five years which is what you would say so for ratings and indices i would say those have the same moat in five years it's hard for them to get bigger right like ratings isn't they rate 94 of all all debt issuances so it's already basically a monopoly well right what's five years more after 100 years yeah of building that moat five years

is in a long time in that perspective. As we close things out, let's talk about the valuation, the numbers, the financials. How did you model this business and how does it relate to the current stock price valuation? I'm seeing I actually got that market cap wrong. You have the right number here,

139 billion, not 163 billion. Yeah, and as we're talking about this, it's after the big tariff announcement. So markets are changing every day and the market cap might change wildly here as well. But as of today, S&P Global has a market cap of $139 billion. Before I get into what that implies for the valuation, I'm going to take a stab at some growth rates and margins. So I was actually fortunate to do this before I saw any sort of valuation multiple, which is always nice. If you can really, if you can research a company

and then you can guess or estimate what their growth rates are going to be in the future before you've seen the valuation, it's kind of nice. Because then you can not have any sort of, I don't know, not come in there with any assumptions on the business or feeling like you want to own the stock and hopefully won't dictate what your assumptions for growth rates are. But let's go segment by segment. I'm going to give you the growth rate that I expect on the top line. And then what I think the margins will look like in a steady state, obviously ratings, if interest rates spike up, it could change, but I'm just going to say set steady state. So the ratings business, I expect they will grow revenue 6% to 7% a year, probably for the foreseeable future, but at least out to 2029.

So all these numbers are out to 2029. Steady state margin, 62%, basically what they're currently earning. I don't see why that would really change. And then software, I expect – and here's probably where the most controversial estimates are. I expect revenue growth, and this is saying there's no acquisitions. Obviously, there could be, and that could help revenue growth. But if there were no acquisitions, I think the software business will grow revenue 2% to 3% a year, and the steady state margins would be 24%. That's about what their margins are now. We can talk about that in a second. But the last one is indices. Once again, slightly market dependent here, but revenue growth, I expect 10% annually, steady state margin, 68%. It's currently what they're earning. So all these indices and ratings, basically my assumption is that nothing changes. Software, I think there's a bit of a slowdown in revenue over the next five years. On those assumptions, the business would be earning about $7.8 billion in operating income. The current enterprise value is just under $150 billion.

So they're trading at 18 times their 2029 operating income on those assumptions. Definitely not the cheapest thing out there. It just isn't. However, that is somewhat pessimistic assumptions on the software business. If they're able to improve margins in the software division, I could be way wrong here. But I'm not – and maybe I've missed something in my analysis, but I don't see why there should be like rapid margin expansion there. I also didn't mention anything about the buyback here. At the current rate, they're reducing shares outstanding by about 2% a year.

So that would definitely help, but it's still kind of too far off from the valuation that I would like for me to want to buy here, even if you factor in the buybacks. So am I buying? I think you can probably detect it from my tone, but the answer is no. If I could buy just the ratings and indices segments, I'd love to, but you got to buy the software too. And it's not that their software is a terrible business, but I just don't think it's going to grow very quickly, which you're kind of paying for at today's current price. Long story short, I think there's better opportunities out there. Yeah, I'm with you on this one.

Pretty much in agreement. Even if you include that shares outstanding dropping, there is the risk through multiple compression. Again, assuming your assumptions are correct, which I think directionally they should be, you could have flat returns for the rest of the decade. that's not a risk i like taking no yeah it's obviously wide moat very well been around forever i don't see why that would change but i don't think you can forecast very strong growth which

at 18 times 2029 earnings you got to hope that their growth's a little faster than what i forecasted here yep and it shareholders of the long term as long as management doesn't totally destroy shareholder value with dumb decisions you should do fine but maybe we're just being a little greedy maybe we think we're better and that's a dumb thing to say but i want to pull up the stock chart here well i'm not sharing it but people can get the gist of the numbers the 2020 yeah late 2021 high was about $475 that was a very expensive earnings multiple there today the stock is trading at $438 so if you think well five years they're going to keep growing and growing and growing again multiple compression already caused flat returns for the next for the last three years

a little less than three that can easily happen for the next five yeah overall i mean there's a lot to love about the business i don't know if i'd necessarily well if you've owned this for a long time i think there's probably a chance you're going to be just fine but yeah if if you're seeing better opportunities out there this might be a chance to find quality stocks that trade at potentially half the valuation what uh price would you be interested if i were paying sub 10 times my estimate of 2029 earnings so that's about a i think like probably a 30 or 40 percent drawdown from here who knows that could be that could happen by this friday the way markets are going hopefully honestly hopefully not that would be scary

But who knows? That can happen. That can happen. You never know. Yeah. This isn't a very volatile stock either. So it doesn't trade like – I don't know. It tends to not move around too much.

And you know what? I bet – maybe I can figure this out. I bet there's a high degree of passive ownership here, which is kind of ironic. Yeah, it's a self-fulfilling cycle. Yeah. All right. Well, I'll hit the disclosure here. Another good episode.

I hope everyone enjoyed it. Again, we've done quite, I would say, an eclectic collection of stock reports this year. New Holdings, Mexican Airports, this one, S&P Global. What else did you cover, Ryan? You've done another one. I can't even remember. This year? Maybe it wasn't memorable then.

Well, hey, upcoming, I'm going to be doing Interactive Brokers. another almost an inception style one where one of our sponsors, I'm going to be doing that one, but hey, they're growing accounts rather quickly. And I think that's another high quality business. So look out for that one in your feeds. We're going to be doing an investor overview next week on Leloo, one of the best investors out there. And as always on the investing power hours, which we do live on Wednesdays, we are going to cover all the investing news of the week, But let's hit the disclosure as we get out of here. We are not financial advisors. Anything we say on this show is not formal advice or recommendation. Ryan and I are any podcast

guests may hold securities discussed on this podcast. We have held them in the past and may buy, sell, or hold them in the future. Thank you everyone once again, and we'll see you next week. Thank you.