The end of cheap money has caught up with market markers:
Their shares are down more than 28% this year, far behind the
index. Both run indexes and sell tons of data and analytics services. And both are highly insulated from the competition, which makes their stocks good long-term bets. MSCI, however, looks stronger in the near term.
S&P (ticker: SPGI) jolted investors last week by withdrawing its financial guidance for the year, a month after it largely reiterated its outlook. Its credit rating business is struggling as global bond issuance slumps. S&P now expects rated debt issuance to be down more than 30% from 2021 levels, which will reduce ratings revenue by $600 million from its previous forecast. Its stock fell 5% last week.
S&P has of course extended well beyond credit ratings. Alongside its eponymous indexes, it has accumulated data and analysis in areas such as commodities and energy, and it recently completed a merger with data firm IHS Markit. Diversification into more data and analytics is expected to reduce credit scores to 30% of total revenue in 2023, from nearly half in 2021.
Still, headwinds on bonds could make it difficult for S&P stocks to rebound. Fed rate hikes increase corporate financing costs and make debt issuance less attractive. Many companies took on debt when rates were low and seem much less inclined to issue bonds until rates stabilize.
Oppenheimer analyst Owen Lau expects debt headwinds to ease, in part because rates will stabilize and companies will have to replace maturing securities with new bonds. S&P is not credited with its exposure to the booming energy sector, he argues. And since more of its revenue comes from licensing and analytics, it should be less susceptible to the cycle. Lau sees the stock hitting $435 next year, gaining 30% from a recent price of around $335.
Still, S&P shares are trading at 23 times estimated 2023 earnings, a premium for the market. It would be reasonable if he could meet Wall Street’s 20% earnings growth target. But that could hinge on a pause in rate hikes, a resumption of debt issuance and a “soft landing” for the economy, all potentially strong orders.
MSCI (MSCI), at a recent price of $438, is more of a pure play on indexing, data and analysis, and asset-based fees tied to its indexes. The company, which calculates more than 267,000 indices daily, is also seeing steady growth in data services for environmental, social and governance, or ESG, ratings.
Weak global equity markets are weighing on MSCI’s asset-based fees. Analysts expect earnings growth of 14.6% in 2022, well below the 27% pace in 2021. The stock’s price-to-earnings ratio has fallen from 62 times earnings during the pandemic to 34 times now, based on 2023 estimates. That’s still double the multiple of the S&P 500, making MSCI stock quite expensive.
MSCI has attractive secular growth engines including ESG ratings, bond and thematic indices and data tools for private assets. It also has a retention rate of over 90% for subscriptions, licenses, and other products.
Investors pay a steep premium for MSCI, relative to S&P Global. The latter could be a value play on a bond rally. Until that happens, MSCI seems like the best bet.
Write to Daren Fonda at [email protected]