The United States lawsuit against Standard and Poor's has provided a great buying opportunity for the McGraw-Hill Companies (MHP) and Moody's (MCO). While the lawsuit is trying to promote competition in the ratings industry, a 2006 law "discourages entry and discourages new ideas and new ways of doing things," says Lawrence White a professor of economics at New York University's Leonard N. Stern School of Business. The big three, McGraw-Hill, Moody's and Fitch are responsible for 96% of the ratings industry.
Let's look at some earnings history and future projections for McGraw-Hill:
So far for 2012, earnings have added up to $2.69, and they have beat earnings projections for the last 4 quarters. Estimates for the 4th quarter for 2012 are $0.72.
On January 30th, McGraw-Hill increased their dividend by almost 10%, to $1.12 per share, which is now a decent 2.5% yield at $44.50 per share. McGraw-Hill is one of the few companies that have increased their dividend every year for the last 40 years.
On February 12th, McGraw-Hill will announce earnings. A great earnings report could bounce this stock right back to the highs we saw before this downturn. The 3rd quarter results were very positive, as McGraw-Hill financial reported a 15% increase in revenue and McGraw-Hill Education posted an 11% decline. This is great news, as McGraw-Hill sold their education company to Apollo Global Management (APO) for 2.5 Billion. The growth engine for this company is here to stay.
What does this mean for an investor? Buy McGraw-Hill and Moody's today as a discount. I'm not the only one with this recommendation, as Raymond James also tagged this stock with a strong buy rating and a $62 price target. Their business will not go away, and any penalty that may be assessed against them will just be a slap on the hand. Reading this article, there was no profit for S&P for selling bonds they have rated, so I'm not quite sure what was gained by the ratings for these companies and if the lawsuit has much merit. At most, a small penalty will be assessed and the way they assess bonds may be altered for the future. The business model and the profits are still going to be there. A forward PE of under 12 and continued earnings growth projected for 2013 should continue to drive McGraw-Hill even beyond prior 52 week highs.