McGraw-Hill Posts Strong Q1 Earnings - Analyst Blog

McGraw Hill Financial, Inc. MHFI posted first-quarter 2014 earnings per share of 89 cents, which beat the Zacks Consensus Estimate by a couple of cents. The reported figure also rose 12% year over year.

Total revenue of this Zacks Rank #3 (Hold) stock increased 5% year over year to $1,236 million owing to strong performance of the Platts business and S&P Dow Jones Indices. However, revenues fell short the Zacks Consensus Estimate of $1,237 million.

McGraw Hill Financial reiterated its 2014 earnings guidance. The company expects adjusted earnings in the range of $3.75–$3.85 per share. The current Zacks Consensus Estimate stands at $3.80 per share for 2014.

Segment Details

Standard & Poor's Ratings Services segment revenues increased 1% to $569 million while its operating profit fell 4% to $240 million.

Transaction revenues, which include ratings of publicly issued debt and bank loan as well as corporate credit estimates, fell 7% to $245 million. However, non-transaction revenues, which include annual contracts, surveillance fees and subscriptions, rose 9%. International revenues increased 6% to $264 million.
 
S&P Capital IQ segment revenues grew 4% to $301 million. Excluding ongoing portfolio restructuring, organic revenues rose 6%. S&P Capital IQ's international revenues increased 4% to $102 million. Moreover, the segment's operating income rose 6% to $53 million.

S&P Dow Jones Indices revenues rose 18% to $137 million in the said quarter, driven by growth in assets under management (AUM) in exchange-traded funds. The segment's operating income increased 43% to $91 million.

The company noted that AUM in exchange-traded funds based on the S&P Dow Jones indices rose 27% to $667 billion.

Commodities & Commercial Markets segment revenues increased 6% to $251 million, reflecting strong performance at Platts, which witnessed a 14% revenue increase to $148 million. Revenues at Commercial Markets fell 3%. J.D. Power registered double-digit revenue growth on the back of its strong auto business in China and customer advertising. The segment operating income increased 27% to $76 million.

Financial Aspects

McGraw-Hill Financial ended the quarter with cash and short-term investments of $1,531 million and long-term debt of $799 million. For the quarter, the company incurred capital expenditures of $20 million and generated free cash flow of $85 million.

During the first quarter, McGraw-Hill Financial bought back 2.2 million shares and has 47.8 million shares left to be repurchased under the current share buyback authorization.

Our Take

McGraw-Hill Financial remains well positioned in major market sectors and will likely benefit from its strategic investments in businesses to generate long-term profitability. The company is restructuring its portfolio of businesses to concentrate more on high-growth operations, thereby enhancing shareholders' value through proper capital allocation.

Despite these measures, rising competition from peers such as Fitch, FactSet Research Systems Inc. FDS, Moody's Corp. MCO and Dun & Bradstreet DNB remains a concern.