The McGraw-Hill Companies Inc. (MHP), a publisher and provider of financial information and media services, posted higher-than-expected third-quarter 2010 results on the heels of robust performance across Standard & Poor’s (S&P’s) services, U.S. elementary-high school and higher education markets, and global energy information products.
The quarterly earnings of $1.22 per share topped the Zacks Consensus Estimate of $1.09, and rose 14% from $1.07 posted in the prior-year quarter. On a reported basis, including one-time items, earnings came in at $1.23 per share, up 15% from the year-ago quarter.
McGraw-Hill now expects fiscal 2010 earnings to be at the high-end of the new guidance range of $2.60 to $2.65 per share versus $2.55 to $2.65 provided earlier.
McGraw-Hill’s total revenue of $1,979.8 handily beat the Zacks Consensus Revenue Estimate of $1,946 million, and jumped 5.5% from the prior-year quarter helped by growth in Education and Financial Services segments, but offset by a decline in its Information and Media segment.
An increase in the top-line coupled with effective cost management enabled McGraw-Hill to register an 11.8% growth in total adjusted operating profit of $601.7 million, whereas operating margin expanded 170 basis points to 30.4%.
The Education segment recorded an increase of 5.5% in revenue to $1,054.7 million, reflecting a revenue growth of 6.7% to $534.7 million at McGraw-Hill School Education Group and an increase of 4.3% to $520 million at McGraw-Hill Higher Education, Professional and International Group.
A robust performance in the state new adoption market, reflecting significant orders from the adoption states (Texas, California and Florida) and increase in enrollments led to the growth in McGraw-Hill School Education Group segment. Management still expects the segment to grab about 30% of the estimated $825 million to $875 million state new adoption market.
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 higherenrollment in U.S. academic institutions.
Management expects elementary-high school market to rise in the range of 4% to 6%. Furthermore, management hinted that the U.S. higher education market is expected to rise by 8% to 10% in fiscal year 2010.
Financial Services revenue grew 9.5% to $697.4 million, driven by a revenue expansion of 11.1% to $473.2 million at S&P’s Credit Market Services, and a growth of 6.3% to $224.2 million at S&P’s Investment Services.
Transaction revenue at S&P’s Credit Market Services, which includes ratings of publicly-issued debt and bank loan, and corporate credit estimates, soared 27.6% to $163 million, whereas Non-transaction revenue at S&P’s Credit Market Services, which includes annual contracts, surveillance fees and subscriptions, grew by 4% to $310.2 million.
McGraw-Hill informed that increase in new issuance in the global high-yield bond market and strong syndicated leveraged bank loan market resulted in an increase in S&P’s Credit Market Services revenue.
S&P’s Investment Services benefited from the Capital IQ brand that had a client base of approximately 3,300 at the end of the quarter and robust S&P indices results.
Capital IQ recently acquired a smaller competitor, TheMarkets.com, thereby strengthening its position in the highly competitive financial data provider sector.The inclusion of TheMarkets.com further enhances its global reach by another 2,400 institutional investors worldwide.
The acquisition will facilitate Capital IQ to provide a comprehensive research package to its buy-side clients, which will not only include fundamental and quantitative research and analysis solutions but will also cover equity and market research reports and earnings estimates with valuation models from leading brokers.
Information & Media revenue tumbled 4.7% to $227.8 million mainly due to a revenue decline of 7.1% to $204.1 million at Business-to-Business Group, but partially offset by an increase of 23.5% to $23.6 million at Broadcasting Group.
Excluding the divestiture of the BusinessWeek magazine (now part of Bloomberg), revenue for the Information & Media segment rose by 5.1%, whereas Business-to-Business Group jumped 3.3%.
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.
We have a Neutral rating on McGraw-Hill. However, the stock holds a Zacks #2 Rank, which translates into a short-term Buy recommendation.
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