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Earnings Preview: McGraw-Hill

Zacks Equity Research

The McGraw-Hill Companies Inc. (MHP) – a publisher and a provider of financial information and media services – is slated to release its financial results for the third quarter of fiscal 2012 on Friday, November 2, 2012.

Earlier, the results were scheduled to release on October 31, 2012; however, it has been postponed to Friday, November 2, 2012, owing to bad weather conditions arising from Hurricane Sandy.

The current Zacks Consensus Estimate for earnings is $1.30 per share, ranging between a low of $1.28 and a high of $1.35 per share. The current estimate reflects a 7.4% increase from $1.21 per share reported in the prior-year period. Revenue, as per Zacks Consensus Estimate for the quarter, is valued at $1,989 million.

We believe the company’s focus on growth and value plan along with the acquisition made by the company recently have aided the earnings estimate to move up, which is expected to continue in the upcoming quarters.
In the last reported quarter, McGraw-Hill acquired Credit Market Analysis Limited (CMA) from CME Group Inc. (CME), which is an independent data provider in the over-the-counter markets. The acquisition strengthens S&P Capital IQ’s position in the market compared to its peers.

Synopsis of the Last Quarter

McGraw-Hill’s second-quarter 2012 adjusted earnings increased 25% to 85 cents a share and also surpassed the Zacks Consensus Estimate of 76 cents. However, including one-time items, earnings increased 11% year over year.

The company stated that the strong performance of S&P Indices/ S&P Capital IQ and Commodities & Commercial boosted the quarterly profits.

McGraw-Hill’s total revenue inched down 1% year over year to $1,547 million and came below the Zacks Consensus Estimate of $1,587 million.

(For full report on earnings study: McGraw-Hill Beats on Bottom Line)

Agreement of Estimate Revisions

For the to-be-reported quarter, 2 out of 6 analysts raised their earnings estimates while none lowered the same over the past 30 days. During the last 7 days none of the analysts changed their estimates.
Moreover, for fiscal 2012, a similar trend was noticed over the last 7 as well as 30 days, with 2 out of 8 analysts revising their estimates up and none lowering the same over the same time frame.

Magnitude of estimate Revisions

For the upcoming quarter, the Zacks Consensus Estimate moved up by a penny to $1.30 per share over the last 30 days, whereas in the past 7 days it remained unchanged.
For fiscal 2012, the Zacks Consensus Estimate increased by 5 cents to $3.40 per share in the last 30 days, whereas no changes were seen over the last 7 days.

Mixed Earnings Surprise History

With respect to earnings surprise, McGraw-Hill has beaten the Zacks Consensus Estimate in three out of the last four quarters, whereas it missed the estimate in one quarter. The company has topped the Zacks Consensus Estimate by an average of 6.2% in the trailing four quarters.

Neutral on McGraw-Hill

With an aim to boost the shareholders’ value, McGraw-Hill announced extensive growth and value measures, including the separation of the company into two independent companies, McGraw-Hill Financial and McGraw-Hill Education. McGraw-Hill expects to complete the split-up by the end of fiscal 2012.

Further, the company added that it will focus on abridging costs by $100 million to ensure that higher costs would not be an impediment in margin expansion at both Financial and Education.

However, the company’s results could be negatively impacted by lower volume of debt securities issued in the capital markets. Financial distress of the recent kind could either dent investor’s demand for debt securities or make issuers reluctant to issue such securities. In addition, increase in interest rates or credit spreads, may adversely affect the general level of debt issuance.

Due to the factors mentioned above, we currently maintain our long term ‘Neutral’ recommendation on the stock. McGraw-Hill, which competes with Pearson plc (PSO), holds a Zacks #2 Rank, translating it into short-term Buy rating on the stock based on positive earnings surprise in the last three successive quarters.

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