(MHP) McGraw-Hill Beats The Street on Bottom-Line

The McGraw-Hill Companies Inc. (MHP), a publisher and provider of financial information and media services, recently posted second-quarter 2012 adjusted quarterly earnings of 85 cents a share that came way ahead of the Zacks Consensus Estimate of 76 cents, and jumped 25% from the prior-year quarter’s earnings of 68 cents.

However, including one time items, earnings increased 11% year over year to 76 cents a share. The company stated that the strong performance of S&P Indices/ S&P Capital IQ and Commodities & Commercial boosted the quarterly profits.

On a consolidated basis, management now expects earnings to be at the higher end of the previous guidance of $3.25 to $3.35 a share in fiscal 2012.

McGraw-Hill’s total revenue inched down 1% year over year to $1,547 million and came below the Zacks Consensus Estimate of $1,587 million.

Earlier, the company updated its growth and value plan through filing an initial Form 10 Registration Statement with the U.S. Securities and Exchange Commission.

Through its growth and value plan the company’s primary strategy is to create two “focused companies” with optimal-size capital and cost arrangement for enhancing client commitment while increasing management’s focus and responsibility. Further, management believes the split will provide each of the independent companies with some synergies and benefits.

Segment Details

Total revenue of McGraw-Hill Financial, which includes S&P Capital IQ/S&P Indices, Standard & Poor’s Ratings and Commodities & Commercial, increased 5% to $1,073 million compared with $1,020 million in the prior-year quarter. Adjusted operating income marked an increase 9.4% year over year to $394 million.

S&P Capital IQ/S&P Indices segment revenue grew 10% to $366 million, driven by an increase of 10% in both subscription and non-subscription revenue to $269 million and $97 million, respectively. Segment adjusted operating income increased 17% to $115 million.

Revenue for S&P Capital IQ, which comprises Integrated Desktop Solutions, Enterprise Solutions and Research & Analytics, increased 9% to $277 million in the reported quarter. Capital IQ had a client base of over 4,200 at the end of the quarter, reflecting a growth of 13% from the prior-year, on the back of increase in subscriptions and platform enhancements.

The company acquired Credit Market Analysis Limited (CMA) from CME Group Inc. (CME), at the end of the reported quarter.

London-based Credit Market Analysis Limited is an independent data provider in the over-the-counter markets. The acquisition strengthens S&P Capital IQ’s position in the market, where it competes with Thomson Reuters Corporation (TRI), FactSet Research Systems Inc. (FDS) and Bloomberg.

With growing needs of investors to access readily available data, a fierce competition has emerged among the companies offering financial information solutions to grab a wider market through superior functionality and investor oriented services.

To grab its share of market, the company took a similar stance in past and acquired QuantHouse, the provider of market statistics and trading solutions along with R2 Financial Technologies that offers risk and scenario-based analytics across different asset classes to investors, risk and portfolio managers for pricing, hedging and capital maintenance.

These moves enable McGraw-Hill to offer investors access to global exchange pricing, securities valuations and asset analytics, while facilitating S&P Capital IQ to create real-time platforms, data base and analytics.

Further, the acquisition of TheMarkets.com by Capital IQ strengthened its position in the highly competitive financial data provider sector. The acquisition facilitates Capital IQ to provide a comprehensive research package to its buy-side clients, which not only include fundamental and quantitative research as well as analysis solutions but also cover equity and market research reports and earnings estimates with valuation models from leading brokers.

Moreover, CME Group and McGraw-Hill announced the commencement of their index business with the launch of S&P-Dow Jones Indices, on June 29, 2012.

CME Group owned 90% of the JV between CME Group and News Corp.’s (NWSA) Dow Jones, which also owns Dow Jones Indexes, before the JV between CME Group and McGraw-Hill was established in November last year. The JV aims to tap the rapidly growing index business.

The transaction is expected to be immediately accretive to McGraw-Hill’s earnings and S&P-Dow Jones Indices is expected to drive profit growth through enhanced revenues, asset-class expansion, cost synergies, highly efficient infrastructure and reduced capital requirements, while generating free cash flow.

This is also validated by the fact that three of the top five Equity Index Futures and Options contracts traded and cleared in the first four months of 2012 were based on S&P-Dow Jones Indices benchmarks.

Revenue increased by 12% to $89 million for S&P Indices during the second quarter. The company witnessed increase in the number of exchange-traded funds (ETFs), mutual funds and exchange-traded derivatives.

Standard & Poor’s Ratings segment revenue inched up 1% to $483 million during the quarter. Operating income decreased 2% to $208 million.

Transaction revenue, which includes ratings of publicly issued debt and bank loan, and corporate credit estimates, increased 4% to $203 million. The increase reflected a sharp rise in U.S. public finance issuance.

Non-transaction revenue, which includes annual contracts, surveillance fees and subscriptions, inched down 2% to $280 million, reflecting negative impact of foreign exchange rates. However, excluding the impact of currency fluctuations, revenue increased 2%.

Commodities & Commercial segment revenue rose 9% to $241 million driven by strong performance in Platts’ revenue. Operating income jumped 45% to $71 million.

Commodities marked a growth of 19% to $121 million during the period. Excluding the acquisition of Steel Business Briefing Group, revenues increased 15% to $117 million.

Revenues inched down 1% in Commercial as increases in J.D. Power and Associates were offset by declines at McGraw-Hill Construction and Aviation Week.

McGraw-Hill Education segment experienced a decrease of 12% in revenue to $474 million, reflecting 20% decrease in revenue to $233 million in School Education Group coupled with a 2% decrease in revenue to $241 million in Higher Education, Professional and International Group. The Education segment marked a 36% improvement in operating profit $57 million during the quarter.

Financial Aspects

McGraw-Hill ended the quarter with cash and cash equivalents of $836 million, long-term debt of $799 million, and shareholders’ equity of $1,730 million. The company incurred capital expenditures of $42 million and generated negative free cash flow of $122 million, year-to-date.

McGraw-Hill recently completed its accelerated share repurchase program. The company repurchased $1.5 billion shares since January 2011. It currently has 22.7 million shares remaining under the existing authorization.

Currently, we have a long-term Neutral rating on McGraw-Hill, which competes with Pearson plc (PSO). Moreover, the company holds a Zacks #2 Rank, which translates into a short-term Buy recommendation.

Read the full analyst report on “MHP”
Read the full analyst report on “CME”
Read the full analyst report on “NWSA”
Read the full analyst report on “TRI”
Read the full analyst report on “PSO”
Read the full analyst report on “FDS”
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