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S&P Global Benefits From Acquisitions Amid Weak Issuance

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Shares of S&P Global Inc (SPGI - Free Report) have gained 8.3% in the past year, outperforming the 5.1% rally of the Zacks S&P 500 composite.

The company recently posted mixed third-quarter 2018 results, with the company’s earnings beating the Zacks Consensus Estimate and revenues missing the same.

Adjusted earnings per share (EPS) of $2.11 beat the Zacks Consensus Estimate by 10 cents and rallied 23.4% on year-over-year basis. Revenues of $1.54 billion lagged the consensus mark by $37 million but increased 2.2% year over year.

S&P Global has an impressive earnings surprise history, beating estimates in all of the trailing four quarters with an average of 5.3%. The Zacks Consensus Estimate for current year EPS has been revised 0.5% upward in the past 30 days.

What’s Driving S&P Global?

The business information services industry is benefitting from a strong economy that is leading to robust manufacturing and non-manufacturing activities as well as higher corporate spending post the tax reform. So the company’s offerings should continue to see good demand.

Acquisitions have enabled S&P Global to consistently innovate, increase differentiated content and develop new products. So far in 2018, the company made acquisitions of RateWatch, Kensho and Panjiva. RateWatch is a great addition to S&P Global’s bank data offering. The Kensho acquisition is expected to enable S&P Global improve core operations by applying actionable insights through the use of AI solutions and sophisticated algorithms, thereby augmenting efficacy. The Panjiva buyout is likely to enhance the company’s Global Market Intelligence's data and analytical offerings for diverse customers across the globe, generating higher revenues.

Going ahead, we expect S&P Global to continue adding advanced technology and data sets through acquisitions, which in turn, should boost top- and bottom-line growth.

Management has executed well in recent times. This has helped S&P Global build cash, cash equivalents and restricted cash of $2.2 billion at the end of third-quarter 2018. The company generated $498 million cash from operating activities. Free cash flow was $432 million. The significant amount of cash provides it the flexibility to pursue any growth strategy.

Risks

Issuance in the U.S. and Asia has been lumpy for quite some time, which is weighing on S&P Global’s Ratings revenue. The initial issuance was so strong that it crowded issuers capacity to tap re-pricing. In the last reported quarter, Ratings revenues decreased 5% year over year.

The market for credit rating, research, investment and advisory services is highly competitive. S&P Global’s financial segment, which consists of the Standard & Poor’s brand, competes globally on the basis of several attributes such as quality of ratings, research and investment advice, client service, range of products and services and technological innovation.

Industry bellwethers, Moody's Corp. and Fitch Ratings through their investor friendly moves may hurt S&P Global’s market share, and in turn weigh upon the top line and strain margins.

Zacks Rank & Stocks to Consider

Currently, S&P Global is a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A few other better-ranked stocks in the broader Business Services sector are Paychex, Inc (PAYX - Free Report) , WEX Inc (WEX - Free Report) and Automatic Data Processing Inc (ADP - Free Report) , each carrying a Zacks Rank #2 (Buy). Long-term expected EPS (three to five years) growth rates for Paychex, WEX and Automatic Data Processing are 8.5%, 15% and 12.5%, respectively.

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