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Company Description

McGraw-Hill Companies, Inc. is a leading provider of information products and services to business, professional and education markets worldwide. The company believes that through acquisitions, new product and service development, and a strong commitment to customer service, many of its business units have grown to be leaders in their respective fields. The company is organized into four businesses: Education, Standard & Poor's Credit Market Services, McGraw-Hill Financial, and Information & Media.

Analysis by Divisions

The Financial Services division represented 44% of revenues and 73% of operating profit in 2009. It operates under the Standard & Poor's brand and provides services to investors, corporations, governments, financial institutions, investment managers and advisors globally. S&P provides independent credit ratings, credit risk evaluations, and credit ratings-related information and products.

A recent restructuring included the realignment of the Financial Services segment into two separate segments: Standard & Poor's, the credit ratings company; and McGraw-Hill Financial, with such brands and businesses as S&P Indices, Capital IQ, Valuations & Risk Strategies and MarketScope Advisor.

The Education division contributed to 40% of revenues and 20% of operating profit. It operates in the elementary and high school, college and university, professional, international and adult education markets. In the children and teens market, MHP sells textbooks (print and digital versions) and supplementary material, and provides assessment and reporting services. In the college and university and the international market, MHP sells textbooks and other resources.

The Information and Media Services division represented 16% of revenues and 7% of operating profit in 2009. It includes J.D. Power and Associates, McGraw-Hill Construction, Platts, and Aviation Week. Also, the segment's Broadcasting Group includes four ABC-affiliated TV stations, plus five Azteca America affiliated stations. In 2009, MHP sold BusinessWeek, which had been part of the Information and Media Services division.

Fundamentals

Market Cap 11.3B Beta 1.21
Revenue (FYR) $6.2B EPS (TTM) $2.66
Shares Out. 307.0M Book Value $7.46
Dividend Yield 2.73% P/E 13.9x
Div/Share $1.00 Price/Sales (FYR) 1.8
Ex-Div Date 2/22/11 P/Cash Flow (TTM) 8.9x
Pay Date 3/10/11 Operating Margin 22.86%

Major competitors Market cap P/E ratio (12TTM) EPS growth (5 years)
McGraw-Hill Companies Inc (MHP) 11.3B 13.89x +3.74%
Pearson PLC (NYSE:PSO) 13.7B 20.35x +18.32%
Reed Elsevier PLC (NYSE:RUK) 20.6B 22.77x -2.76%
Rovi Corp (NASDAQ:ROVI) 6.6B 42.59x -
Meredith MDP 1.2B 11.6x -1.8%
Scholastic Corp (NASDAQ:SCHL) 880M 15.2x +0.75%
Wiley, John (NYSE:JW.A) 2.9B 16.9x +12.24%

Industry Overview

McGraw-Hill Companies is in the Printing & Publishing Industry of the Services Sector.

In the Education segment, which targets elementary and high school programs, new-adoption textbook spending in 2010 was $850-$875 million. The company's target market share was around 30%. The new textbook market was about $500 million in 2009 and $980 million in 2008. Standard & Poor’s Stock report forecast a year-over-year decline to $750-$800 million in 2011, given current constraints on state finances. Adoption polices in Texas are expected to be a critical factor in this business.

However, the U.S. higher education market continues to grow strongly. New students in the fall of 2010 grew 4%, after increasing 8% in 2009. On the other hand, MHP's textbook sales growth declined, and the company lost market share. Looking ahead, management is forecasting a short term decline in operating profit in the Education group as it invests in new publications and digital initiatives.

The S&P Credit Market Services division contributed to 28% of 2010 revenue and 47% of operating profit. Revenue increased by 13% during the period. It represents the highest-margin division of MHP: 44.5%. The current year has a good start, according to management.

The McGraw-Hill Financial division represents 20% of total revenue and operating profit, It was driven by ETFs and other investment products that license S&P indices. At quarter-end, there were 301 ETFs based on S&P indices. Assets under management based on these indices reached $300 billion, versus $230 billion at the end of 2Q10. Overall MHF revenue rose 12%, including acquisitions. Standard & Poor’s Stock report forecasts a 4-6% growth in 2011.

The Information & Media business significantly improved operating margins, now that BusinessWeek has been divested. Management continues to expect around 4-6 % growth also in the publishing businesses.

Positive Points

  • Making investments in Education division means the potential of bigger returns in online publishing. Higher education text books which are actually expensive, and financial information can be substituted by eBooks. Proliferation of cheaper and more powerful tablets, eBook readers and smart phones.
  • McGraw-Hill Companies trades at a lower multiple of trailing earnings than the average for the Printing & Publishing Industry and at a lower multiple of sales than the Industry Returns. The trailing twelve month return on assets for McGraw-Hill Companies, Inc. is higher than the industry average.
  • Made $360 million investments in recent acquisitions: Markets.com, research and estimates business for MHP's Capital IQ; Tegrity lecture capture service; PIPAL Research; and an equity interest in a provider of educational and career enhancement services in China.
  • A mix growth in acquisitions and new products development

Negative Points

  • Increase competition in the credit rating sector: Reuters estimate that the potential loss of market share could mean a cut of as much as $0.20 in MHP's EPS.
  • Closely related to overall economic conditions (advertising-driven business models, such as the television stations; elections, bond-ratings business)
  • The business is exposed to hikes in interest rates, as corporate debt issuance could fall if rates increase significantly. However, the company has offset those risks by increasing the percentage of ratings and services not tied to the new-issue market.
  • Recently, the textbook business has been volatile as states have to cope with tight budgets.

Valuation

MHP shares have traded between $27 and $39 over the past 52 weeks, and are currently trading at about 13-times, versus a historical range of 7-15. In terms of price/sales, the current ratio is 1.9, versus a range of 1.0-2.6. On price/cash flow, the current multiple is 7.5, with a range of 10-3. Reuters observed that the shares tend to fall back to the 200-day moving average after a run.

  • With a P/E ratio of 15X for FY2012 and a projected 2012 EPS of $3.14= $47, at $34/share this represents a 38% target return in 12-18 months, estimating a five-year EPS growth rate of 8%.
  • The firm has a tendency to propose moderate financial targets and to outperform EPS forecasts by analysts.
  • With a correction around $34, the stock looks a value play and has interesting potential.

Sources: Standard & Poor’s Stock report, Argus Company Report, Reuters ProVestor Plus Report

Source: Assessing McGraw-Hill Companies' Valuation