The McGraw-Hill Companies Inc. is focusing on restructuring its portfolio of businesses and concentrating more on high growth operations, thereby enhancing shareholder value through proper capital allocation.
The company announced that it has entered into an agreement with Apollo Global to divest its education division for $2.5 billion. McGraw-Hill stated that the company will be known as McGraw Hill Financial, upon the completion of the deal and will primarily focus on capital and commodities markets and include iconic brands like S&P Ratings, S&P Capital IQ, S&P Indices, Platts and Commercial Markets.
Moreover, McGraw-Hill came up with better-than-expected bottom line results during the recently concluded quarter. The company posted third-quarter 2012 adjusted quarterly earnings of $1.33 per share that came ahead of the Zacks Consensus Estimate of $1.30, and increased 10% from the prior-year quarter earnings of $1.21.
Strong performance of the S&P Indices/ S&P Capital IQ and Commodities & Commercial boosted the quarterly profits. Following the healthy results, management now expects adjusted earnings to be in the range of $3.35 – $3.40 per share for fiscal 2012, up from its earlier guidance of $3.25 – $3.35.
The company provides an attractive investment opportunity on the profitability front. The company has a TTM pre-tax margin of 20.1%, significantly above the peer group average of 8.9%. Further, it generates a TTM net margin of 13.7%, well above the peer group average of 5.6%. The company’s TTM Return on Equity (ROE) of 54.4%, TTM Return on Investment (ROI) of 32.2% and TTM Return on Asset (ROA) of 13.5% are all better than the peer group average.
However, McGraw-Hill Education continues to remain a drag on its financial results as the segment experienced a decrease of 11% in revenue to $836 million during the third quarter, reflecting a 16% decrease in revenue to $352 million in School Education Group coupled with a 6% decrease in revenue to $484 million in Higher Education, Professional and International Group. The Education segment marked a 15% decrease in adjusted operating profit, which came in at $268 million during the quarter.
Further, the market for credit rating, research, investment and advisory services is highly competitive, which may affect the company's financials. McGraw-Hill’s financial segment, which consists of the Standard & Poor’s brand, competes globally on the basis of several attributes such as quality of ratings, research and investment advice, client service, range of products and services, and technological innovation.
Give the pros and cons, we maintain our Neutral recommendation on the stock with a target price of $56.00. Moreover, McGraw-Hill, which competes with Pearson plc (PSO - Snapshot Report), holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ recommendation.