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Analyst Blog

On Nov 4, 2013, we reiterated our Neutral recommendation on business service provider McGraw Hill Financial, Inc. . This was based on the company’s better-than-expected third-quarter 2013 results, its upbeat outlook for 2013 and the strategic growth initiatives undertaken, offset by legal issues and a competitive backdrop.

Why the Reiteration?

McGraw Hill Financial posted third-quarter 2013 adjusted earnings per share of 80 cents on Oct 22, which rose 13% year over year and surpassed the Zacks Consensus Estimate by couple of cents. Moreover, total revenue increased 7% year over year to $1,194 million, aided by strong performance across all business segments. Total revenue also came ahead of 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, up from the earlier projection of $3.15–$3.25. The current Zacks Consensus Estimate stands at $3.30 per share for 2013.

Moreover, McGraw Hill Financial’s strategic investments in businesses facilitate it to generate long-term profitability. The formation of S&P Dow Jones Indices, along with S&P Capital IQ’s acquisitions of Credit Market Analysis Limited, QuantHouse, R2 Financial Technologies and TheMarkets.com position it well against competitors.  These measures have also enabled the company to grab a wider market through superior functionality and investor oriented services and in turn boost top and bottom-line performance.

Additionally, McGraw Hill Financial, which competes with Dun & Bradstreet Corp. , has been enhancing shareholders’ value through repurchases and dividend payouts. For the nine months of 2013, the company bought back 15 million shares. In January, it raised the annual dividend by 9.8% to $1.12. Notably, since 1974, the company has boosted its dividend at a compound annual dividend growth rate of around 9.6%.    

However, McGraw Hill Financial’s division, S&P faces a $5 billion civil fraud case from the U.S. Department of Justice. S&P has been charged for deliberately providing high ratings in 2007 to U.S. collateralized debt obligations (CDOs) and residential mortgage-backed securities (RMBS) that underperformed and spurred the collapse of the housing market. Though the company applied for dismissal of the complaint, the court has ruled it out. This legal quagmire keeps investors wary.
 
Additionally, volatility in markets with respect to the volume of debt issued by capital markets could dent the company’s results. A highly fragmented market for credit rating, research as well as investment and advisory services remain a threat to top-line growth. Moreover, industry bellwethers like Moody's Corp. and Fitch Ratings offer significant competition to McGraw Hill Financial.

Other Stocks to Consider

Currently, McGraw Hill Financial carries a Zacks Rank #2 (Buy). A better performing stock in the business services sector is Nielsen Holdings N.V. , which carries a Zacks Rank #1 (Strong Buy).

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