McGraw-Hill: A Financial Services Value Play?

Aug. 3.09 | About: S&P Global (SPGI)
The McGraw-Hill Companies, Inc. (MHP) operates in three segments: Education, Financial Services, and Information & Media. The Financial Services segment operates under the Standard & Poor’s brand. Information & Media includes Business Week, J.D. Power and Associates, and Platts, a source for energy-industry information and services.
On July 29, McGraw-Hill reported its 2nd quarter results. Strength in U.S. higher education, the global corporate bond market and at Platts, were offset by softness in the elementary-high school market, structured finance and advertising.
As you can see from the chart below, Financial Services accounts for almost half of MHP's revenue, and almost all of its operating profit.
click to enlarge
Click to enlarge The following table compares data from the 1st half of 2009 vs. 2008:
Segment
Operating Margin
Revenue Decline (yoy)
Profit Decline (yoy)
Education
-6%
-13%
N/A
Financial Services
40%
-7%
-11%
Information & Media
4%
-10%
-53%
Total
18%
-10%
-20%
Click to enlarge
Just as GE was classified as a Financial services company in 1990s, when more than 50% of its profit were from financial services, McGraw-Hill certainly fits the bill of a financial services company today. It should not be valued as a publishing company.
In good times before, Standard & Poor’s essentially printed money. According to Sean Egan, president of Egan-Jones Ratings Company, the major 3 rating agencies are in the business of providing timely and accurate ratings for the benefit of investors when, in fact, these companies have, for the last 35 years, been in the business of facilitating the issuance of securities for the benefit of corporate issuers and underwriters, i.e., the entities which pay them. Investors rely on these ratings because they don’t have the time, the inclination, or the information to do their own work. No wonder S&P still enjoys a 40% operating margin, even in this difficult environment.
On the other hand, Business Week has struggled as it contends with both the recession and a shift of readers to the Internet, with ad pages for its global edition down 34.3 percent during the quarter. According to the Washington Post,
eMarketer projects that nearly all media sectors will experience advertising spending declines in 2009. Hardest hit will be traditional media such as newspapers, radio, magazines and TV, each falling by 14% or more.
McGraw-Hill has increased its quarterly dividend payment for 36 consecutive years and has a record of regular payments since 1937. Its Price/EBITDA is 6.3, and has over $1.3 billion operating cash flow annually. With such brand names as Business Week, J.D. Power and Associates, and Platts that can all be sold or spun off, it is a definite a value play candidate.

Disclosure: I have no position in MHP. MHP is my company’s client. All data is from publicly available sources such as SEC fillings.