MCGRAW-HILL COMPANIES INC. $49 (New York symbol MHP; Conservative Growth Portfolio, Consumer sector; WSSF Rating: Average) is a leading publisher of school textbooks. It also publishes BusinessWeek magazine and several trade journals, and owns four TV stations.
However, it gets roughly two-thirds of its profits from its Standard & Poor’s subsidiary, which provides credit ratings and opinions on a variety of investments. Institutional investors rely on these ratings to select investments.
The stock rose from $44 in July 2005 to $60 in March 2006, but has moved down recently on fears that weakness in global stock markets will hurt Standard & Poor’s revenue growth. Fears of lower advertising revenue at its magazine and TV business have also weighed on the stock.
McGraw-Hill should earn $2.33 a share this year, and the stock trades at 21.0 times that estimate. This figure includes $0.13 a share in expenses related to stock options issued to employees.
The company recently changed the way it grants stock options, which should minimize their impact on its future earnings.
This move cut McGraw-Hill’s earnings in the first quarter of 2006 by $0.04 a share. Excluding this charge, income rose 20%, to $0.24 a share from $0.20 a year earlier. Revenue rose 10.7%, to $1.14 billion from $1.03 billion. The $0.726 dividend yields 1.5%.
Standard & Poor’s is now expanding its financial services apart from ratings, such as security price quotes. It also earns fees for licensing its stock market indexes (such as the Standard & Poor’s 500) to mutual fund companies and institutions that sponsor exchange traded funds.
McGraw-Hill’s education business gained in the past few years from increased federal funding under the No Child Left Behind Act. But textbook sales in the next year or two could suffer until school boards need to replace their current inventories. More college students are also buying discounted textbooks from online sellers, which cuts into McGraw-Hill’s profit margins.
The stock may make little progress in the next few months. But McGraw-Hill could unlock some of its value by breaking itself up, or spinning off some of its operations as separate companies.
McGraw-Hill is a hold.