We have maintained our long-term Neutral recommendation on The McGraw-Hill Companies Inc. with a target price of $48.00, following its fourth-quarter 2012 results.
Why the Reiteration?
McGraw-Hill’s strategic investments in businesses facilitate it to generate long-term profitability. The formation of S&P Dow Jones Indices with CME Group Inc. (CME - Analyst Report) coupled with S&P Capital IQ’s acquisitions of Credit Market Analysis Limited, QuantHouse, R2 Financial Technologies and TheMarkets.com position it well against its competitors like Thomson Reuters Corporation (TRI - Snapshot Report), FactSet Research Systems Inc. (FDS - Analyst Report) and Bloomberg to grab a wider market through superior functionality and investor oriented services and in turn help boost the top- and bottom-line results of the company.
McGraw-Hill posted fourth-quarter 2012 adjusted quarterly earnings of 72 cents a share that came in line with the Zacks Consensus Estimate but jumped 56% year over year. Total revenue escalated 22% year over year to $1,226 million, reflecting strong performance across all its divisions. Following healthy results, management now expects adjusted earnings to be in the range of $3.10 to $3.20 per share for 2013, reflecting solid growth of 15% year over year.
Going forward, McGraw-Hill along with its iconic brands remains focused on high growth operations to drive long-term profitability. However, the market for credit rating, research, investment and advisory services is highly competitive and we prefer to maintain our recommendation on the stock.
Moreover, The U.S. Department of Justice has filed a $5 billion civil fraud case against S&P ratings, following which the company lost a significant amount of market value. Adding to its woes, Moody's has cut the debt rating of McGraw-Hill by two levels -- to Baa2 from A3 -- and can reduce it again. Evidently, these developements have severely impacted the company.
The pros and cons of the stock are well defined through our Zacks Rank #3 (Hold).