McGraw-Hill Reports Strong 1Q

The McGraw-Hill Companies Inc. ( ) , a publisher and provider of financial information and media services, recently posted strong first-quarter 2012 results. The quarterly earnings of 51 cents a share came ahead of the Zacks Consensus Estimate of 49 cents, and jumped 30% from the prior-year quarter’s earnings of 39 cents.

However, including one time items, earnings increased 11% year over year to 43 cents a share.

The company stated that the strong performance of S&P Indices/ S&P Capital IQ and Commodities & Commercial boosted the quarterly profits.

Buoyed by healthy results, the company stood by its earlier guidance and expects earnings of $3.25 to $3.35 in fiscal 2012 on a consolidated basis.

McGraw-Hill’s total revenue increased 6% year over year to $1,331 million and surpassed the Zacks Consensus Estimate of $1,315 million.

Segment Details

Total revenue of McGraw-Hill Financial, which includes S&P Capital IQ/S&P Indices, Standard & Poor’s Ratings and Commodities & Commercial, increased 8% to $1,035 million compared with $958 million in the prior-year quarter. Operating income marked an increase 10% year over year to $357 million.

S&P Capital IQ/S&P Indices segment revenue grew 9% to $353 million, driven by an increase of 10% in subscription revenue to $265 million and 4% in non-subscription revenue to $88 million. Segment operating income increased 11% to $107 million.

Revenue for S&P Capital IQ, which comprises Integrated Desktop Solutions, Enterprise Solutions and Research & Analytics, increased 10% to $274 million in the reported quarter. Capital IQ had a client base of over 4,000 at the end of the quarter, reflecting a growth of 11% from the prior year, on the back of increase in subscriptions and platform enhancements.

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 also cover equity and market research reports and earnings estimates with valuation models from leading brokers.

During the quarter, S&P Capital IQ acquired QuantHouse, the provider of market statistics and trading solutions.

The acquisition of QuantHouse strengthens S&P Capital IQ’s position in the market, where it competes with Thomson Reuters Corporation ( TRI - Snapshot Report ) , FactSet Research Systems Inc. ( FDS - Analyst Report ) and Bloomberg.

Revenue increased by 5% to $79 million for S&P Indices during the first quarter. The company also witnessed increase in the number of exchange-traded funds (ETFs) on S&P indices.

Standard & Poor’s Ratings segment revenue increased 5% to $466 million during the quarter. Operating income inched down 2% to $186 million.

Transaction revenue, which includes ratings of publicly issued debt and bank loan, and corporate credit estimates, increased 10% to $194 million. The increase reflected rise in U.S. public finance issuance and U.S. corporate issuance.

Non-transaction revenue, which includes annual contracts, surveillance fees and subscriptions, inched up 2% to $272 million, reflecting growth in the European non-financial corporate issuance and gains at CRISIL.

Commodities & Commercial segment revenue rose 13% to $233 million driven by strong performance in Platts’ revenue. Operating income jumped 64% to $64 million.

Revenue for Commodities surged 18% to $115 million, buoyed by robust demand for Platts’ proprietary content. Including the acquisition of Steel Business Briefing, revenue for the Commodities increased 22% to $118 million. Revenue for Commercial was driven by J.D. Power & Associates.

McGraw-Hill Education segment experienced a decrease of 2% in revenue to $296 million, reflecting 10% decrease in revenue to $95 million in School Education Group offset by a 2% increase in revenue to $201 million in Higher Education, Professional and International Group. The Education segment reported an operating loss of $65 million during the quarter.

Financial Aspects

McGraw-Hill ended the quarter with cash and cash equivalents of $908 million, long-term debt of $798 million, and shareholders’ equity of $1,786 million. The company incurred capital expenditures of $15 million and generated negative free cash flow of $118 million during the quarter.

McGraw-Hill recently completed its accelerated share repurchase program. The company repurchased $1.5 billion shares since January 2011. It currently has 22.7 million shares remaining under the existing authorization.

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 #2 Rank, which translates into a short-term ‘Buy’ recommendation.