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McGraw Hill Financial, Inc. (MHFI - Analyst Report) posted third-quarter 2013 adjusted earnings per share of 80 cents, which rose 13% from the year-ago quarter figure and surpassed the Zacks Consensus Estimate by two cents.

Including non-recurring items, McGraw Hill Financial posted earnings per share of 84 cents, up 58% year over year.

Total revenue of this Zacks Rank #2 (Buy) stock increased 7% year over year to $1,194 million, reflecting strong performance across all business segments. Moreover, the reported revenues surpassed the Zacks Consensus Estimate of $1,180 million.

Buoyed by strong results, McGraw Hill Financial raised its 2013 earnings guidance. The company now expects earnings in the range of $3.25–$3.30 per share compared with its earlier projection of $3.15–$3.25. The current Zacks Consensus Estimate stands at $3.30 per share for 2013.

Segment Details

Standard & Poor’s Ratings Services segment revenues increased 8% to $540 million, attributable to strength witnessed across entity credit ratings, bank loan ratings and rating evaluation services. Adjusted operating profit rose 5% to $227 million.

Transaction revenues, which include ratings of publicly issued debt and bank loan as well as corporate credit estimates, rose 6% to $227 million. Alongside, non-transaction revenues, which include annual contracts, surveillance fees and subscriptions, rose 9%.  

S&P Capital IQ segment revenues grew 3% to $293 million. Excluding ongoing portfolio restructuring, organic revenues grew 5%. S&P Capital IQ's international revenues increased 8% to $100 million. Moreover, the segment’s adjusted operating income rose 10% to $59 million.

S&P Dow Jones Indices revenue rose 14% to $124 million in the said quarter, driven by robust performance of Exchange-traded funds and exchange-traded derivatives, partly offset by tepid growth in mutual funds and data subscription business. The segment’s adjusted operating income rose 23% to $80 million.

The company noted that assets under management in exchange-traded funds rose 29% to $585 billion on S&P Dow Jones indices. 

Commodities & Commercial Markets segment revenues increased 7% to $255 million, reflecting strong performance at Platts, which witnessed a 17% revenue increase to $142 million. Revenues at Commercial Markets fell 4%.  J.D. Power registered mid single-digit growth, due to its robust auto business in China. Adjusted segment operating income increased 24% to $82 million.

Financial Aspects

McGraw-Hill Financial ended the quarter with cash and cash equivalents of $1,577 million and long-term debt of $799 million. For the nine months ended Sep 30, 2013, the company incurred capital expenditures of $55 million and generated free cash flow of $388 million.

During the quarter, McGraw-Hill Financial bought back 5.7 million shares and 15 million shares for the nine months ended Sep 30, 2013. It has another 1.9 million shares remaining under the existing share repurchase authorization.

Our Take

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.

On Aug 6, 2013 the company concluded a voluntary tender offer for additional shares of CRISIL Limited, whereby its ownership in CRISIL increased from 52.8% to 67.8% (for an investment of $214 million).

Despite these measures, rising competition from peers such as Fitch, FactSet Research Systems Inc. (FDS - Analyst Report), Moody’s Corp. (MCO - Analyst Report) and Dun & Bradstreet (DNB - Analyst Report) remains a concern.

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