PSO Pearson Plc

The McGraw-Hill Companies Inc. (MHP), a publisher and provider of financial information and media services, recently posted second-quarter 2011 results. The quarterly earnings of 68 cents a share beat the Zacks Consensus Estimate by a penny, and rose 11.9% from 61 cents earned in the prior-year quarter.

The Zacks Consensus Estimate for the quarter had remained stagnant prior to the earnings release with none of the 8 analysts following the stock revising their estimates in the last 30 or 7 days.

McGraw-Hill now expects to achieve high-end of fiscal 2011 earnings guidance range of $2.79 to $2.89 per share. The current Zacks Consensus Estimate for fiscal 2011 is $2.88.

McGraw-Hill’s total revenue of $1580.8 million handily beat the Zacks Consensus Estimate of $1,551 million, and jumped 7.2% from the prior-year quarter.

The company registered healthy performance across McGraw-Hill Financial, Standard & Poor's and Information & Media, which were partially offset by decline at McGraw-Hill Education due to delay in orders.

Segment Details

McGraw-Hill Financial segment revenue grew 13.5% to $333.4 million, driven by an increase of 15.3% in subscription revenue to $245.7 million and 8.9% in non-subscription revenue to $87.7 million. Excluding, the acquisition of TheMarkets.com, revenue jumped 9.3% to $321.1 million.

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.

Capital IQ had a client base of over 3,700 at the end of the quarter, reflecting a growth of 16.5% from the prior-year.

The company also witnessed increase in the number of exchange-traded funds (ETFs) on S&P indices, which currently stands at 349, portraying a recovery in the worldwide market and fresh investments from investors. McGraw-Hill launched 16 new ETFs during the quarter under review.

Standard & Poor’s (S&P’s) segment revenue climbed 18.6% to $480.3 million during the quarter. Transaction revenue, which includes ratings of publicly issued debt and bank loan, and corporate credit estimates, soared 31.4% to $195.7 million, whereas non-transaction revenue, which includes annual contracts, surveillance fees and subscriptions, grew 11.1% to $284.6 million.

McGraw-Hill informed that a rise in global high-yield new issue dollar volume, rise in demand for ratings of bank loans and robust gains in the U.S. investment-grade corporate market benefited S&P’s transaction revenue.

The Education segment experienced a drop of 5% in revenue to $536.6 million, reflecting revenue declines of 10.1% to $292.2 million at McGraw-Hill School Education Group, partially offset by a growth of 1.8% to $244.4 million at McGraw-Hill Higher Education, Professional and International Group.

The higher education and professional market witnessed strong double-digit growth rate across digital products and services, and the increase in demand for online study tools (e.g. McGraw-Hill Connect series, McGraw-Hill Create).

Information & Media segment revenue rose 9.7% to $246 million mainly driven by revenue growth of 11.7% to $222.2 million at Business-to-Business Group, partially offset by a decline of 6% to $23.8 million at Broadcasting Group.

McGraw-Hill has decided to dispose its Broadcasting Group with an aim to re-evaluate its portfolio of businesses and concentrate more on global brands, and thereby enhance shareholder value through proper capital allocation. However, the company did not highlight the time limit for the sale of the division.

Financial Aspects

McGraw-Hill ended the quarter with cash and cash equivalents of $1,300.2 million, long-term debt of $1,198 million, and shareholders’ equity of $2,335.8 million. The company incurred capital expenditures of $44.6 million and generated free cash flow of $72.5 million during six-month period.

During the quarter, the company bought back 4.4 million shares aggregating $177 million.  In the first half of fiscal 2011, McGraw-Hill repurchased 7.7 million shares for $300 million at a price of $38.96 per share.

The company in its attempt to optimize shareholders’ return recently announced a new share repurchase program. The new program authorizes the company to buyback up to $50 million shares or about 17% of its outstanding shares.

Currently, we have a long-term Neutral rating on McGraw-Hill, which competes with Pearson plc (PSO). However, the company holds a Zacks #2 Rank, which translates into a short-term Buy recommendation.

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