MCGRAW-HILL COMPANIES LTD. $63 (New York symbol MHP; Conservative Growth Portfolio, Consumer sector; Shares outstanding: 351.3 million; Market cap: $22.1 billion; WSSF Rating: Average) has three main operations: school textbooks (40% of sales in 2006, 21% of profit); financial information under the Standard & Poor’s brand (44%, 76%); and the media division which includes BusinessWeek magazine and four TV stations (16%, 3%).

McGraw-Hill’s specialized information products and databases are ideally suited for the Internet, and it is rapidly expanding its online services. Electronic distribution speeds up delivery and cuts costs for postage and paper, while its mainly subscription based services gives it predictable revenue streams.

In 2006, McGraw-Hill’s profits before one-time items grew 12.3%, to $2.56 a share (total $939.3 million) from $2.28 a share ($872.3 million) in 2005. The company began expensing stock option costs in 2006, which cut its earnings by $0.23 a share. Revenue grew 5%, to $6.3 billion from $6.0 billion.

Profits at Standard & Poor’s rose 18% in 2006, and accounted for all of McGraw-Hill’s profit gain. Low interest rates spurred strong merger and acquisition activity, as well as demand for Standard & Poor’s ratings. This division has also benefited from rising global equity markets, since it earns fees from licensing out its Standard & Poor’s stock market indexes to mutual fund companies and exchange traded funds.

Earnings at McGraw-Hill’s textbook division, however, fell 20% in 2006. Many states have cut orders for new textbooks following a big run-up in the past few years. Restructuring charges have also hurt profits. But orders should start to rise again in the next year or two, and the recent cost cuts should lift profits.

Restructuring costs cut profits at the media operations by 18% in 2006. But growing interest in business news and other information, particularly at its Internet sites, should spur revenues in 2007.

McGraw-Hill’s $0.82 dividend yields 1.3%, and the stock trades at 21.6 times its forecast 2007 profit of $2.62 a share. That’s expensive, considering the lackluster outlook for its textbook and media divisions. But the stock could soar if McGraw-Hill were to spin off Standard & Poor’s as a separate company.

McGraw-Hill is a hold.