PSO Pearson Plc

The McGraw-Hill Companies Inc. (MHP), a publisher and provider of financial information and media services, recently 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’s earnings of $1.21.

The company stated that the strong performance of S&P Indices / S&P Capital IQ and Commodities & Commercial boosted the quarterly profits. However, including one time items, earnings decreased 9% year over year to $1.10 per share.

Following the healthy results, management now expects adjusted earnings to be in the range of $3.35 to $3.40 per share for fiscal 2012, up from its earlier guidance of $3.25 to $3.35.  

McGraw-Hill’s total revenue escalated 2% year over year to $1,953 million but fell short of the Zacks Consensus Estimate of $1,989 million.

The company remains on track with its "Growth and Value Plan." Through THIS plan, the company’s primary strategy is to create two "focused companies” with optimal-size capital and cost arrangement for enhancing client commitment while bolstering management’s focus and responsibility. Further, management believes the split will provide each of the independent companies with some synergies and benefits.

(Read our full coverage on this: McGraw Hill Sticks to Value Plan)

Segment Details

Total revenue of McGraw-Hill Financial, which includes S&P Capital IQ/S&P Indices, Standard & Poor’s Ratings and Commodities & Commercial, jumped 15% to $1,117 million compared with $971 million in the prior-year quarter. Adjusted operating income marked an increase of 21% year over year to $402 million. 

S&P Capital IQ/S&P Indices segment revenue grew 13% to $393 million, driven by an increase of 12% in subscription revenue to $281 million along with a 15% rise in non-subscription revenue to $112 million. Segment adjusted operating income increased 5% to $119 million.

During the quarter, the segments international revenue marked an augmentation of 10% to $117 million and now represents about 30% of the segment's total revenue.

Revenue for S&P Capital IQ, which comprises Integrated Desktop Solutions, Enterprise Solutions and Research & Analytics, strengthened 9% to $284 million during the reported quarter. Capital IQ had a client base of over 4,400 at the end of the quarter, reflecting growth of 15% from the prior-year, on the back of increased subscriptions and platform enhancements.

The company acquired Credit Market Analysis Limited (CMA) from CME Group Inc. (CME). London-based Credit Market Analysis Limited is an independent data provider in the over-the-counter markets. The acquisition strengthens S&P Capital IQ’s position in the market, where it competes with Thomson Reuters Corporation (TRI), FactSet Research Systems Inc. (FDS) and Bloomberg.

With the growing need of investors to access readily available data, fierce competition has emerged among the companies offering financial information solutions to grab a wider market through superior functionality and investor oriented services.

To grab its share of the market, the company took a similar stance in the past and acquired QuantHouse, the provider of market statistics and trading solutions along with R2 Financial Technologies that offers risk and scenario-based analytics across different asset classes to investors, risk and portfolio managers for pricing, hedging and capital maintenance.

These moves enable McGraw-Hill to offer investors access to global exchange pricing, securities valuations and asset analytics, while facilitating S&P Capital IQ to create real-time platforms, data base and analytics.

Further, 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.

S&P Indices’ revenue soared 24% to $109 million during the third quarter, benefiting largely from the newly formed S&P Dow Jones Indices. Excluding the impact of the S&P Dow Jones Indices joint venture, revenue marked a decline of 7%.

The company noted that assets under management in exchange-traded funds surged 40% to $390 billion on S&P's indices.  Moreover, assets under management came in at $454 billion, including the Dow Jones Indexes.

The company along with the CME Group announced the commencement of their index business with the launch of S&P-Dow Jones Indices.

CME Group owned 90% of the joint venture (JV) between CME Group and News Corp.’s (NWSA) Dow Jones, which also owns Dow Jones Indexes, before the JV between CME Group and McGraw-Hill was established in November last year. The JV aims to tap the rapidly growing index business.

The transaction is expected to be accretive to McGraw-Hill’s earnings and S&P-Dow Jones Indices is expected to drive profit growth through enhanced revenues, asset-class expansion, cost synergies, highly efficient infrastructure and reduced capital requirements, while generating free cash flow.

Standard & Poor’s Ratings segment revenue augmented 22% to $502 million (highest in 19 quarters). Adjusted operating income increased 28% to $217 million.

Transaction revenue, which includes ratings of publicly issued debt and bank loan, and corporate credit estimates, surged 64% to $215 million. The increase reflected a sharp rise in U.S. and European corporate issuance.  

Non-transaction revenue, which includes annual contracts, surveillance fees and subscriptions, elevated 3% to $287 million.   

Commodities & Commercial segment revenue rose 5% to $239 million, driven by strong performance in Platts’ revenue. Adjusted operating income jumped 29% to $66 million.

Commodities marked growth of 13% to $121 million during the period. Revenues inched down 2% in Commercial as increases in J.D. Power and Associates were offset by declines at other segments.

To further strengthen the Platts division, the company announced the acquisition of Switzerland-based Kingsman SA, provider of price information and analytics for the worldwide sugar and biofuels markets.

McGraw-Hill Education segment experienced a decrease of 11% in revenue to $836 million, 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.

Financial Aspects

McGraw-Hill ended the quarter with cash and cash equivalents of $1,245 million, long-term debt of $799 million, and shareholders’ equity of $1,862 million. The company incurred capital expenditures of $79 million and generated free cash flow of $420 million, year-to-date.  

During the quarter, the company repurchased 5.9 million shares for approximately $295 million, with an average price of $50.35 per share.

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

 
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