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McGraw-Hill Financial 2Q Earnings Beat

Zacks Equity Research

McGraw Hill Financial, Inc. (MHFI) posted second-quarter 2013 adjusted earnings of 92 cents a share, which jumped 31% from the year-ago quarter and comfortably surpassed the Zacks Consensus Estimate of 81 cents.

Total revenue of this Zacks Rank #3 (Hold) stock escalated 17% year over year to $1,250 million, reflecting strong performance of the S&P Ratings and S&P Dow Jones Indices business. Moreover, the reported revenue surpassed the Zacks Consensus Estimate of $1,207 million.

Buoyed by strong results, McGraw Hill Financial raised its 2013 earnings guidance range. The company now expects earnings in the range of $3.15 – $3.25 per share compared with its earlier guidance range of $3.10 – $3.20. The current Zacks Consensus Estimate stands at $3.23 per share for 2013.

Segment Details

Standard & Poor’s Ratings Services segment revenue augmented 24% to $599 million attributable to strength witnessed across corporate issuance and bank loan ratings coupled with sustained recovery experienced in the U.S. structured finance issuance. Operating income jumped 34% to $277 million.

Transaction revenue, which includes ratings of publicly issued debt and bank loan, and corporate credit estimates, surged 41% to $287 million. Alongside, non-transaction revenue, which includes annual contracts, surveillance fees and subscriptions, elevated 12% to $312 million.  

S&P Capital IQ segment revenue grew 3% to $287 million, driven by an increase of 4% in subscription revenue to $260 million. Non-subscription revenue increased 2% to $27 million. S&P Capital IQ's international revenue rose 2% to $97 million. However, the segment’s adjusted operating income fell 7% to $55 million.

S&P Dow Jones Indices revenue soared 39% to $123 million during the quarter.  However, excluding the sales related to the Dow Jones Indexes, revenue marked an increase of 6% to $94 million.  Segment’s adjusted operating income rose 6% to $80 million.

The company noted that assets under management in exchange-traded funds surged 34% to $469 billion on S&P's indices.  Moreover, assets under management came in at $546 billion, including the Dow Jones Indexes.

Commodities & Commercial Markets segment revenue increased 8% to $259 million, reflecting strong performance at Platts, which witnessed a 14% rise in revenue to $137 million. Revenue at Commercial Markets edged up 2%.  J.D. Power registered a mid single-digit growth, while Aviation Week witnessed high single-digit growth in revenue. Segment operating income increased 16% to $83 million.

Financial Aspects

McGraw-Hill Financial ended the quarter with cash and cash equivalents of $1,900 million, long-term debt of $799 million and shareholders’ equity of $1,271 million. For the six months ended Jun 30, 2013, the company incurred capital expenditures of $43 million and generated free cash flow of $145 million.

On Mar 25, McGraw-Hill Financial announced an accelerated share repurchase program of $500 million. The company stated that it expects to complete the program by this week and would receive 0.7 million shares, bringing the total share count to 9.3 million. 

Our Recommendation

McGraw-Hill Financial remains well-positioned in major market sectors, and will likely benefit from its strategic investments in businesses to generate long-term profitability The company is restructuring its portfolio of businesses to concentrate more on high growth operations, thereby enhancing shareholder value through proper capital allocation.

Following its rationale, the company reclassified its Education segment as discontinued operations, which was divested to Apollo Global Management LLC (APO) for $2.4 billion in cash. Yesterday, the company announced the sale of Aviation Week to Penton. However, financial terms of the deal were not disclosed. Moreover, the company intends to increase its ownership in CRISIL to 75% from the existing 53%.

Despite these measures, increasing competition from the likes of privately held Fitch, Moody’s Corp. (MCO) and Dun & Bradstreet (DNB) remains a concern.

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