Mhp - Zacks Investment Research



The McGraw-Hill Companies |(MHP – NYSE) |$54.11 | |

Note: More details to come; changes are highlighted. Except where noted, and highlighted, no other sections of this report have been updated

Reason for Report: Flash Update: 1Q13 Earnings Update.

Prev. Ed.: Mar 19, 2013, 4Q12 Earnings Update.

Flash Update

On Apr 30, 2013, McGraw-Hill which will be rechristened as McGraw Hill Financial and commence trading under a new symbol “MHFI” on May 14, posted better-than-expected first-quarter 2013 earnings of $0.80 a share that outpaced the Zacks Consensus Estimate of $0.72, and jumped 29% year over year. However, management reiterated its 2013 earnings guidance of $3.10 to $3.20 per share.

The company reclassified its Education segment as discontinued operations, which was divested to Apollo Global Management for $2.4 billion in cash.

Total revenue escalated 14% year-over-year to $1,181 million, but fell short of the Zacks Consensus Estimate of $1,185 million.

Segment Details

Standard & Poor’s Ratings Services segment revenue augmented 20% to $561 million attributable to strength witnessed across corporate issuance and sustained recovery experienced in the U.S. structured finance issuance. Operating income increased 39% to $259 million.

Transaction revenue, which include ratings of publicly issued debt and bank loan, and corporate credit estimates, surged 36% to $264 million. On the other hand, non-transaction revenue, which includes annual contracts, surveillance fees and subscriptions, elevated 9% to $297 million.

S&P Capital IQ segment revenue grew 5% to $288 million, driven by an increase of 5% in subscription revenue to $260 million. Non-subscription revenue also jumped 5% to $28 million. S&P Capital IQ's international revenue climbed 12% to $98 million. Segment’s operating income fell 9% to $56 million.

S&P Dow Jones Indices revenue soared 45% to $115 million during the first quarter. However, excluding the revenue related to the Dow Jones Indexes, revenue marked an increase of 9% to $86 million.  Segment’s operating income surged 47% to $67 million.

The company noted that assets under management in exchange-traded funds surged 26% to $450 billion on S&P's indices.  Moreover, assets under management came in at $525 billion, including the Dow Jones Indexes.

Commodities & Commercial Markets segment revenue inched up 1% to $236 million, as the strong performance at Platts was offset by sluggish revenue result at Commercial market due to lower advertising at J.D. Power and Associates. Aviation Week also faced tough comparison. Segment operating income tumbled 2% to $62 million.

Commodities marked growth of 10% to $130 million during the period. However, revenue fell 8% at Commercial Markets.

Financial Aspects

McGraw-Hill ended the quarter with cash and cash equivalents of $1,905 million, long-term debt of $799 million and shareholders’ equity of $1,082 million. The company incurred capital expenditures of $22 million and generated negative free cash flow of $86 million.

Concurrent to the sale of its education division, McGraw-Hill on Mar 25 announced an accelerated share repurchase program of $500 million.

MORE DETAILS WILL COME IN THE IMMIMENT EDITIONS OF ZACKS RD REPORTS ON MHP.

Portfolio Manager Executive Summary [Note: only highlighted material has been changed]

The McGraw-Hill Companies, Inc., (MHP) incorporated in Dec 1925 and headquartered in New York, is a diversified publisher and provider of financial information, and also a provider of media services to customers in over 40 countries.

Of the brokerage firms in the Digest group providing ratings on the stock, 85.7% were positive while 14.3% of the firms had a neutral stance. None of the firms had a negative stance.

Positive or equivalent outlook (6/7 firms or 85.7%) – McGraw-Hill is a well managed company with several diverse businesses that have historically delivered strong returns on capital. Furthermore, the firms believe that MHP remains well-positioned in major market sectors, and will likely benefit from its strategic investments in businesses to generate long-term profitability. The formation of S&P Dow Jones Indices coupled with S&P Capital IQ’s acquisitions of Credit Market Analysis Limited, QuantHouse, R2 Financial Technologies and position it well against its competitors to grab a wider market through superior functionality and investor oriented services and in turn help boost the top- and bottom-line results of the company. Moreover, on the cost front, McGraw-Hill remains on track to abridge costs drastically to ensure competent operating channels.

The analysts believe that the company’s spin off of its education division reflects its strategic attempt to restructure its portfolio of businesses and concentrate more on high growth operations, thereby enhancing shareholder value through proper capital allocation.

Neutral or equivalent outlook (1/7 firms or 14.3%) – The analyst remains positive on the long-term prospects of the Company. However, the market for credit rating, research, investment and advisory services is highly competitive and may dent the results.

Mar 19, 2013

Overview [Note: only highlighted material has been changed]

The McGraw-Hill Companies, Inc., (MHP) incorporated in Dec 1925 and headquartered in New York, is a diversified publisher and provider of financial information, and also a provider of media services to customers in over 40 countries. The company is a leading textbook publisher and owns one of the top credit rating agencies (Standard & Poor’s). Earlier, the company operated through two business segments: McGraw-Hill Financial and McGraw-Hill Education.

However, at the end of the fourth quarter of fiscal 2012, the company reclassified its Education segment as discontinued operations. McGraw-Hill announced that it has entered into an agreement with Apollo Global to divest its education division for $2.5 billion.

The company now primarily focuses on capital and commodities markets and includes iconic brands like S&P Ratings, S&P Capital IQ, S&P Indices and Platts. The company currently operates through:

➢ S&P Capital IQ: The segment provides risk evaluation, investment research and data to potential investors, corporations, governments, financial institutions, investment managers and financial advisors globally.

➢ S&P Dow Jones Indices: The company along with CME Group, announced the commencement of its index business with the launch of S&P-Dow Jones Indices.

➢ Standard & Poor’s Ratings Services: Standard & Poor’s is the world’s foremost provider of credit ratings offering investors information and independent benchmarks for their investment and financial decisions.

➢ Commodities & Commercial Markets: The Segment consists of business-to-business companies specializing in commercial and commodities markets, and comprises brands such as J.D. Power and Associates (acquired in 2005), McGraw-Hill Construction, Platts and Aviation Week.

The analysts identified the following issues as critical to the evaluation of the investment merits of MHP:

|Key Positive Arguments |Key Negative Arguments |

|Sales of customized criterion-referenced tests: Due to the No Child Left Behind|Regulation on the Company’s ratings business: The increasing talk of |

|policy, annual testing of children in reading and mathematics during grades |regulatory overhaul with respect to S&P’s ratings business will have a |

|three to eight is mandatory. Sales of customized criterion-referenced tests, |negative effect on both the client base and the fee structure, if it |

|therefore, continue to grow as states meet new federal requirements. |materializes. |

|Financial services: Prospects for financial services remain favorable and are |Competition: Although McGraw-Hill’s businesses are dominant, the Company|

|considered the key catalysts for an upside in the valuation of the stock. |faces strong competition from Moody’s and Fitch in information services, |

| |Houghton Mifflin, Pearson, and Reed Elsevier in Education, and |

| |competitive challenges in advertising from Internet companies and other |

| |advertising mediums. |

|Effective cost management: The Company continues to keep costs and expenses |Interest rate volatility: A significant rise in interest rates or |

|under control. |increasing volatility could negatively affect the amount of debt issuance|

| |or reduce issuers’ willingness or ability to issue such securities. |

NOTE: The Company’s fiscal references coincide with the calendar year.

Its website is .

Mar 19, 2013

Long-Term Growth [Note: only highlighted material has been changed]

McGraw-Hill’s diverse portfolio with a strong balance sheet coupled with the capital allocation in acquisitions and share repurchases keep the analysts constructive in the long run. The Company’s strategic capital allocation on acquisitions is accelerating revenue growth and would provide a strong medium for future growth.

The company's strategic investments in businesses facilitate it to generate long-term profitability. The formation of S&P Dow Jones Indices coupled with S&P Capital IQ’s acquisitions of Credit Market Analysis Limited, QuantHouse, R2 Financial Technologies and position it well against its competitors to grab a wider market through superior functionality and investor oriented services and in turn help boost the top- and bottom-line results of the company. This is evident from the strong performance of the company's S&P Capital IQ and S&P Dow Jones Indices businesses.

McGraw-Hill reclassified its Education segment as discontinued operations as it entered into an agreement with Apollo Global Management to divest its education division for $2.5 billion. The move augurs well for the company as its education division has been confronting shrinking revenues due to reduced spending on textbooks by the government.

Further, it will allow the company to restructure its portfolio of businesses and concentrate more on high growth operations, thereby enhancing shareholder value through proper capital allocation.

The analysts expect upside potential in financial services segment depending on bond issuance, especially in structured finance (i.e., mortgage backed and high yield securities). Over the long term, the analysts remain bullish regarding MHP, attributable to the combination of an attractive collection of franchise assets, and significant earnings leverage to an eventual recovery in the global debt capital markets.

However, McGraw-Hill’s longer-term outlook principally depends on the potential changes in the regulatory environment for credit rating agencies. Moreover, the U.S. Department of Justice has filed a $5 billion civil fraud case against S&P ratings, following which the company lost a significant amount of market value. Adding to its woes, Moody's cut the debt rating of McGraw-Hill by two levels -- to Baa2 from A3 -- and can reduce it again. Evidently, these developments have had a severe impact on its growth.

Mar 19, 2013

Target Price/Valuation [Note: only highlighted material has been changed]

|Rating Distribution |

|Positive |85.7%↓ |

|Neutral |14.3%↑ |

|Negative |0.0% |

|Avg. Target Price |$59.80↓ |

|Maximum Target |$64.00 |

|Minimum Target |$51.00↓ |

|No. of Analysts with Target Price/Total |5/7 |

Major risks include imminent lawsuits versus S&P post credit crisis. Moreover, McGraw-Hill’s results could be negatively affected by lower volume of debt securities issued in the capital markets. In addition, increase in interest rates or credit spreads may adversely affect the general level of debt issuance.

Recent Events [Note: only highlighted material has been changed]

On Feb 12, 2013, McGraw-Hill posted 4Q12 adjusted quarterly earnings of $0.72 per share that came in line with the Zacks Consensus Estimate but jumped 56% y/y. On a consolidated basis, including McGraw Hill Financial and McGraw-Hill Education, earnings came in at $0.75 a share. Total revenue escalated 22% y/y to $1,226 million.

Revenue [Note: only highlighted material has been changed]

According to the Company and the Zacks Digest model, Net revenues increased 22% to $1,226 million in 4Q12 from $1,004 million in 4Q11.

Provided below is a summary of revenue as per Zacks Digest:

|Revenue ($M) |4Q11A |

|Copy Editor |Sumit Singh |

|Content Ed. |Sumit Singh |

|No. of brokers reported/Total brokers| |

|Reason for Report |Flash |

|QCA |Sumit Singh |

|Lead Analyst |Sumit Singh |

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April 30, 2013

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