Earnings Preview: McGraw-Hill

The McGraw-Hill Companies Inc (MHP - Analyst Report) is slated to report its third-quarter 2011 financial results on Thursday, October 20, 2011. The current Zacks Consensus Estimate for the quarter is $1.23 a share. For the quarter to be reported, the Zacks Consensus Estimate for revenue is $2,041 million.

Second-Quarter 2011, a Synopsis

McGraw-Hill’s quarterly earnings of 68 cents per share came a penny ahead of the Zacks Consensus Estimate, and rose 11.9% from 61 cents earned in the prior-year quarter.

McGraw-Hill’s total revenue of $1580.8 million handily beats the Zacks Consensus Estimate of $1,551 million, and jumped 7.2% from the prior-year quarter.

The company registered healthy performance across McGraw-Hill Financial, Standard & Poor's and Information & Media, partially offset by a decline in McGraw-Hill Education resulting from delay in orders. Management believes that in third-quarter 2011, the elementary and high school market would gain from delayed orders in the second quarter, particularly from Texas.

Third-Quarter 2011 Zacks Consensus

The analysts covered by Zacks, expect McGraw-Hill to post third-quarter 2011 earnings of $1.23 a share. The current Zacks Consensus Estimate reflects a growth of 0.8% from the prior-year quarter’s earnings. The current Zacks Consensus Estimate for the quarter ranges between $1.20 and $1.27 a share.

Zacks Agreement & Magnitude

The current Zacks Consensus Estimate came down by a penny over the last 7 days with 2 out of 7 analysts covering the stock, revising their estimate downwards.

With respect to earnings surprises, McGraw-Hill has topped the Zacks Consensus Estimate over the last four quarters in the range of 1.5% to 11.9%. The average remained at 6.2%. This suggests that McGraw-Hill has outperformed the Zacks Consensus Estimate by an average of 6.2% in the last four quarters.

What Drives Estimate Revision

McGraw-Hill has lost a substantial market value in last 5 years and its rating agency was under fire for its latest U.S. downgrade.

Further, advertising remains an important source of revenue for the Information & Media segment of the company and the slump in advertising revenue rings the alarm about troubled times ahead in the economy, and its susceptibility to such conditions.

However, McGraw-Hill, with the intent of boosting shareholders’ value announced extensive growth and value measures, including the separation of the company into two independent companies, McGraw-Hill Markets and McGraw-Hill Education.

Going with its plan, the company aims to create two "focused companies” with optimal-size capital and cost arrangement for amplifying client commitment and improving strategic and economic suppleness while increasing management’s focus and responsibility.

Further, the company added that it will focus on abridging costs drastically to ensure competent operating channels and will also accelerate the pace of share buybacks to a total of $1 billion for the fiscal year 2011.

McGraw-Hill expects to complete the transaction by the end of 2012 through a tax-free spin-off while the separation plan is subject to the approval by the board of directors.

Currently, we have a long-term Neutral rating on McGraw-Hill, which competes with Pearson plc (PSO - Snapshot Report). Moreover, the company holds a Zacks #3 Rank, which translates into a short-term Hold recommendation.

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