McGraw-Hill's Earnings Beat Estimate
The McGraw-Hill Companies Inc. (MHP), which will be rechristened as McGraw Hill Financial and commence trading under a new symbol “MHFI” on May 14, posted better-than-expected first-quarter 2013 earnings of 80 cents a share that outpaced the Zacks Consensus Estimate of 72 cents, and jumped 29% year over year. However, management reiterated its 2013 earnings guidance of $3.10 to $3.20 per share.
The company reclassified its Education segment as discontinued operations, which was divested to Apollo Global Management LLC (APO) for $2.4 billion in cash.
Total revenue of this Zacks Rank #2 (Buy) stock escalated 14% year-over-year to $1,181 million, but fell short of the Zacks Consensus Estimate of $1,185 million.
Segment Details
Standard & Poor’s Ratings Services segment revenue augmented 20% to $561 million attributable to strength witnessed across corporate issuance and sustained recovery experienced in the U.S. structured finance issuance. Operating income increased 39% to $259 million.
Transaction revenue, which include ratings of publicly issued debt and bank loan, and corporate credit estimates, surged 36% to $264 million. On the other hand, non-transaction revenue, which includes annual contracts, surveillance fees and subscriptions, elevated 9% to $297 million.
S&P Capital IQ segment revenue grew 5% to $288 million, driven by an increase of 5% in subscription revenue to $260 million. Non-subscription revenue also jumped 5% to $28 million. S&P Capital IQ's international revenue climbed 12% to $98 million. Segment’s operating income fell 9% to $56 million.
The company acquired Credit Market Analysis Limited (CMA) from CME Group Inc. (CME). London-based Credit Market Analysis Limited is an independent data provider in the over-the-counter markets. The acquisition strengthens S&P Capital IQ’s position in the market, where it competes with Reuters, FactSet and Bloomberg.
With the growing need of investors to access readily available data, fierce competition has emerged among the companies offering financial information solutions to grab a wider market through superior functionality and investor oriented services.
To grab its share of the market, the company took a similar stance in the past and acquired QuantHouse, the provider of market statistics and trading solutions along with R2 Financial Technologies that offers risk and scenario-based analytics across different asset classes to investors, risk and portfolio managers for pricing, hedging and capital maintenance.
These moves enable McGraw-Hill to offer investors access to global exchange pricing, securities valuations and asset analytics, while facilitating S&P Capital IQ to create real-time platforms, data base and analytics.
Further, the acquisition of TheMarkets.com 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 cover equity and market research reports and earnings estimates with valuation models from leading brokers. The number of S&P Capital IQ Desktop Solutions users rose 10% year-over-year.
S&P Dow Jones Indices revenue soared 45% to $115 million during the first quarter. However, excluding the revenue related to the Dow Jones Indexes, revenue marked an increase of 9% to $86 million. Segment’s operating income surged 47% to $67 million.
The company noted that assets under management in exchange-traded funds surged 26% to $450 billion on S&P's indices. Moreover, assets under management came in at $525 billion, including the Dow Jones Indexes.
The company along with CME Group announced the commencement of their index business with the launch of S&P-Dow Jones Indices.
CME Group owned 90% of the joint venture (:JV) between CME Group and News Corp.’s (NWSA) Dow Jones, which also owns Dow Jones Indexes, before the JV between CME Group and McGraw-Hill was established in November last year. The JV aims to tap the rapidly growing index business.
The transaction is expected to be accretive to McGraw-Hill’s earnings and S&P-Dow Jones Indices is expected to drive profit growth through enhanced revenue, asset-class expansion, cost synergies, highly efficient infrastructure and reduced capital requirements, while generating free cash flow.
Commodities & Commercial Markets segment revenue inched up 1% to $236 million, as the strong performance at Platts was offset by sluggish revenue result at Commercial market due to lower advertising at J.D. Power and Associates. Aviation Week also faced tough comparison. Segment operating income tumbled 2% to $62 million.
Commodities marked growth of 10% to $130 million during the period. However, revenue fell 8% at Commercial Markets.
Financial Aspects
McGraw-Hill ended the quarter with cash and cash equivalents of $1,905 million, long-term debt of $799 million and shareholders’ equity of $1,082 million. The company incurred capital expenditures of $22 million and generated negative free cash flow of $86 million.
Concurrent to the sale of its education division, McGraw-Hill on Mar 25 announced an accelerated share repurchase program of $500 million.
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