McGraw-Hill Beats Estimates

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The McGraw-Hill Companies Inc. (MHP), a publisher and provider of financial information and media services, posted higher-than-expected fourth-quarter 2010 results on the heels of robust performance across Standard & Poor’s (S&P’s) services and global energy information products. The quarter’s results were partially offset by softness witnessed in the education markets.

The quarterly earnings of 55 cents a share beat the Zacks Consensus Estimate of 51 cents, and rose 7.8% from the prior-year quarter. On a reported basis, including one-time items, earnings came in at 50 cents a share, down 5.7% from the year-ago quarter.

The Zacks Consensus Estimate for the quarter remained stagnant prior to the earnings release with only one out 8 analysts following the stock revising the estimate upward in the last 30 days.

McGraw-Hill now expects fiscal 2011 earnings between $2.79 and $2.89 per share. The current Zacks Consensus Estimate for fiscal 2011 is $2.88, which is at the high end of the guidance range.

McGraw-Hill’s total revenue of $1,524.1 handily beat the Zacks Consensus Estimate of $1,498 million, and jumped 4.2% from the prior-year quarter aided by growth in the Financial Services segment, offset by a decline at its Education and Information and Media segment.

Segment Details

Financial Services segment revenue grew 13% to $778.5 million, driven by a revenue expansion of 11.4% to $527.1 million at S&P’s Credit Market Services, and a growth of 16.5% to $251.4 million at S&P’s Investment Services, which includes $12.7 million of revenue from the

S&P’s Investment Services benefited from the Capital IQ brand that had a client base of approximately 3,400 at the end of fiscal 2010 (a growth of 15.8% from the prior-year) and robust S&P indices results.

The acquisition of 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.

Transaction revenue at S&P’s Credit Market Services, which includes ratings of publicly issued debt and bank loan, and corporate credit estimates, soared 30.6% to $199.9 million, whereas non-transaction revenue at S&P’s Credit Market Services, which includes annual contracts, surveillance fees and subscriptions, grew 2.1% to $327.2 million.

McGraw-Hill informed that an increase in new issuance in the global high-yield bond market and rise in demand for ratings of bank loans and public finance benefited S&P’s Credit Market Services revenue.

The Education segment recorded a decline of 4.6% in revenue to $496.3 million, reflecting revenue decreases of 7.7% to $138.2 million at McGraw-Hill School Education Group and 3.3% to $358 million at McGraw-Hill Higher Education, Professional and International Group.

The delay in the purchase of basic materials in adoption states, which includes Texas, Florida, South Carolina and New Mexico, failed to offset the drop in open territory sales during the quarter for the McGraw-Hill School Education Group.

However, the state new adoption market remained promising for McGraw-Hill School Education in fiscal 2010. Management hinted that the segment was able to grab about 30% of the estimated $850 million to $875 million state new adoption market.

During fiscal 2010, the higher education and professional market was buoyed by strong growth registered across digital products and services, and the increase in demand for online study tools (e.g. McGraw-Hill Connect series, McGraw-Hill Create) powered by higher enrollment in U.S. academic institutions. However, quarterly results were dampened by a sales decline registered in December 2010 in the U.S. college as well as international markets.

Information & Media segment revenue fell 1.6% to $249.3 million mainly due to a revenue decline of 4% to $220.9 million at Business-to-Business Group, partially offset by an increase of 21.7% to $28.4 million at Broadcasting Group.

Excluding the divestiture of the BusinessWeek magazine (now part of Bloomberg), revenue for the Information & Media segment rose 7.6%, whereas Business-to-Business Group jumped 6%.

McGraw-Hill sold the magazine, which had long been grappling with a slump in advertising demand amid the global downturn in December 2009 as advertisers migrated to the Internet due to increasing online readership and lower ad prices than print.

Financial Aspects

McGraw-Hill ended fiscal 2010 with cash and cash equivalents of $1,525.6 million, long-term debt of $1,198 million, and shareholders’ equity of $2,291.4 million. The company generated free cash flow of $880.7 million during the year, reflecting an increase of 14.4% from the prior year.

Currently, we have a long-term Neutral rating on McGraw-Hill, which competes with Pearson plc (NYSE:PSO). Moreover, the company holds a Zacks #3 Rank, which translates into a short-term Hold rating, and correlates with our long-term recommendation.