A Little Bit of Everything Gives McGraw-Hill a Boost

Looking for a stock that has its hands in two different, highly profitable areas? Then McGraw-Hill (MHP) may be to your liking.

Business Overview

McGraw-Hill has essentially two business lines: publishing and financial services.

The financial services business is mainly grouped under the Standard & Poor's brand. S&P offers credit ratings and provides research, risk management, and loan analysis services. The segment accounts for about 40% of MHP's total revenues.

MHP's publishing division can be broken down into two parts: education and media. The company is one of the world's largest educational publishers, as it sells textbooks and other materials to schools and universities. Meanwhile, the firm's media segment includes brands such as BusinessWeek and product reviewer J.D. Power and Associates.

Competitive Advantages

Currently, S&P and Moody's together hold an 80% share of the credit ratings business. This market share is protected by a combination of government regulation, reputation, and credibility.

Another interesting advantage for MHP is the strength of the Standard & Poor's brand name. Just about every investor in the world is familiar with the S&P indices, led by the widely-tracked S&P 500 Index, which is the benchmark for countless mutual funds and hedge funds.

S&P maintains these indices and licenses the data to create several products. For example, S&P receives licensing fees on various futures and exchange-traded funds that are based on S&P indices. In addition, the company continues to develop new indices, including a S&P BRIC Index based on the stock markets of Brazil, Russia, India and China. Several of these new indices are being used as the basis for ETFs, and S&P should receive tremendous revenues from these new funds.

While any firm could create an index, thanks to S&P's status as one of the world's leading index providers, the company has a major advantage over the competition.

Growth Drivers

Like Moody's, S&P derives close to 40% of its revenues from overseas markets. The company has a dominant market share (alongside Moody's) in both the U.S. and European Union. And on the emerging markets front, the firm has a hugely successful subsidiary in India as well as operations in China. These two markets are growing at a rapid clip.

S&P has also delivered strong growth in structured finance offerings, particularly credit card bonds and student loan backed bonds. As noted earlier, these are particularly profitable markets for the credit ratings agencies.

Finally, it's impossible to talk about McGraw-Hill's growth prospects without mentioning its enormous educational publishing division. Educational revenues are driven largely by government spending on textbooks and testing materials for public schools.

MHP is a dominant provider in this market, and the firm has spent years developing relationships with state education boards and public school districts. Even better, as a result of the federal No Child Left Behind Act, government spending on testing and textbooks is rising rapidly. And thanks to MHP's strong position in the educational market, it should receive a good chunk of that spending.

Furthermore, its J.D. Powers and Associates awards are highly coveted. If you have ever seen a car commercial, then you know the value placed on winning their award. As consumers recognize and trust the opinion of J.D. Power, this should attract more revenue to McGraw-Hill since it is likely to mean more subscriptions to its product review publications.

Valuation and Outlook

MHP trades at about 21 times 2007 earnings estimates and sports a long-term growth rate of roughly +13%. The steady performance and growth from the S&P division alone merits a premium valuation. Meanwhile, the firm is also a leader in the steady, recession resistant educational market.

And on top of the firm's growth prospects, MHP has a strong track record of paying dividends and buying back stock to boost shareholder value. All in all, MHP looks like a pretty sweet stock for any investor looking for a company with a well-diversified business. With revenues coming from two different directions -- publishing and financial -- holding shares of MHP looks lucrative.

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