S&P Global

S&P Global is a titan in the world of financial information and analytics. Think of it as a company that provides the essential plumbing and scorekeeping for the global financial markets. Its primary business isn't buying or selling stocks itself, but rather selling critical data, ratings, and benchmarks that everyone else—from governments and corporations to hedge funds and ordinary investors—relies on to make decisions. The company operates through several key divisions: its Ratings arm assesses the creditworthiness of companies and countries; its Market Intelligence division provides sophisticated financial data and research tools (like the well-known Capital IQ platform); its Platts division is the go-to source for pricing information in the commodity markets; and its Indices division creates and maintains world-famous market benchmarks, most notably the legendary S&P 500. In essence, S&P Global is deeply embedded in the financial ecosystem, making money by providing indispensable information that fuels global commerce and investment.

Understanding S&P Global means looking at its powerful, distinct business segments, each of which is a powerhouse in its own right.

S&P Global Ratings is one of the “Big Three” credit rating agencies, alongside Moody's and Fitch Ratings. When a company like Apple or a country like Germany wants to borrow billions of dollars by issuing bonds, they pay S&P to get a credit rating (e.g., AAA, BB+, C). This rating is a simple grade that tells investors how likely the borrower is to pay them back. A good rating means lower borrowing costs, making these ratings incredibly valuable. This business model is fantastic for a few reasons:

• The “Big Three” operate as an oligopoly, meaning they have very little competition.
• Companies have to get rated to access capital markets, making demand consistent.
• It's a “toll road” business; S&P gets paid by the issuers, regardless of where interest rates are or which way the market is heading.

It's worth noting a potential conflict of interest: the company being rated is also the one paying for the service. This has led to scrutiny, particularly after the 2008 financial crisis, where many complex mortgage-backed securities received top ratings before spectacularly collapsing.

This is perhaps S&P's most famous division, thanks to the S&P 500, the world's most-watched stock market index. But what does “creating an index” even mean? S&P sets the rules for which companies are included in the index, tracks their performance, and maintains the data. They make money not by investing in the index, but by licensing the S&P 500 brand and data. Every time a fund company creates an exchange-traded fund (ETF) or a mutual fund that tracks the S&P 500 (like the giant SPY and VOO funds), they must pay a recurring licensing fee to S&P Global. With trillions of dollars tracking its indices, this creates a steady, high-margin stream of revenue that grows as the market grows.

These divisions sell high-value financial data and analytics through subscription services.

• Market Intelligence: Its flagship product, Capital IQ, is a sophisticated data platform used by investment bankers, asset managers, and corporate analysts for deep financial research. Once a firm integrates a tool like this into its workflow, it becomes very difficult and costly to switch—a classic “sticky” business model.
• Platts: If you're an oil trader or a utility company, you live and die by Platts' price assessments. They are the benchmark for pricing everything from crude oil to natural gas and LNG. This makes Platts an indispensable information provider in the global energy and commodities markets.

For a value investor, S&P Global is a fascinating case study in what a high-quality business looks like. The company is protected by a massive economic moat, a term popularized by Warren Buffett to describe a company's sustainable competitive advantages. S&P's moat comes from several sources:

• Powerful Brand: The “S&P” name is synonymous with financial integrity and benchmarks, an invaluable intangible asset.
• High Switching Costs: It is extremely difficult for the financial world to switch from the S&P 500 to a different index or for a bank to rip out Capital IQ and replace it with a lesser-known competitor.
• Network Effects: The more people who use and trust S&P's ratings and indices, the more essential they become for everyone else. The S&P 500 is the standard because everyone agrees it's the standard.
• Regulatory Barriers: The credit rating business is heavily regulated, making it nearly impossible for a new competitor to challenge the “Big Three.”

This powerful moat translates into wonderful financial characteristics: high profit margins, predictable recurring revenue, and very low capital needs to grow. It's no wonder that Buffett's Berkshire Hathaway has held a huge position in its direct competitor, Moody's, for decades—it recognizes the supreme quality of this business model.

No business is without risk. For S&P Global, the primary threats are:

• Reputational Risk: Their brand is their biggest asset. Another 2008-style crisis where their ratings are found to be deeply flawed could cause irreparable damage.
• Regulatory Risk: As gatekeepers, they are always under the watchful eye of governments. New regulations could impact their profitability or business practices.
• Valuation: The market knows S&P Global is a fantastic business. As a result, its stock often trades at a high valuation. For the value investor, the challenge isn't identifying the quality of the business, but having the patience to buy it at a reasonable price.