McGraw Hill (MHFI) Tops Q4 Earnings & Sales, Raises View

McGraw Hill Financial, Inc. MHFI ended 2015 on a solid note as the company's fourth-quarter top and bottom-line results improved year over year and exceeded expectations.

Quarterly adjusted earnings per share from continuing operations of $1.04 increased 9.5% from the year-ago quarter and beat the Zacks Consensus Estimate of $1.00.

Revenues advanced 7% to $1,374 million, surpassing the Zacks Consensus Estimate of $1,370 million. Top-line growth was supported by strong performances across S&P Capital IQ and SNL, S&P Dow Jones Indices and Commodities & Commercial Markets, partially offset by a decline witnessed at S&P Ratings Services.

Adjusted operating profit margin expanded 280 basis points (bps) to 38.7%. On excluding deal-related amortization, the same came in at 39.9%.

Segment Details

Standard & Poor's Ratings Services segment revenues declined 7% year over year to $578 million, negatively impacted by a fall in global issuance as well as foreign exchange rate. On a currency-neutral basis, revenues fell 4%. Adjusted operating profit dropped 3% to $252 million while adjusted margin expanded 150 bps to 43.7%.

Transaction revenues, which include ratings of publicly issued debt and bank loan as well as corporate credit estimates, slumped 14% from the year-ago quarter to $247 million, mainly owing to weak structured, global corporate and public bond issuance.

However, non-transaction revenues, which include annual contracts, surveillance fees and subscriptions, increased marginally to $331 million. On a currency-neutral basis, non-transaction revenue jumped 4%, fuelled by strength in Rating Evaluation Service due to heightened M&A activity, along with growth at CRISIL. This was partly offset by soft revenues related to new customer relations.

Region-wise, the segment's domestic and international revenues declined 5% and 8%, respectively.

S&P Capital IQ & SNL segment revenues surged 27% year over year to $405 million. S&P Capital IQ's international revenues increased 17% to $131 million, while domestic revenues soared 33% to $274 million. Further, the segment's adjusted operating profit escalated 22% to $50 million. The company completed the acquisition of SNL on Sep 1, 2015. Fourth-quarter results also comprise one month revenues from SNL.

S&P Dow Jones Indices revenues rose 7% to $151 million in the reported quarter. The segment's adjusted operating profit increased 9% to $94 million. This improvement was backed by growth in license fees from exchange-traded derivatives, OTC derivatives, mutual funds and data feeds, somewhat offset by soft ETF revenues.

Commodities & Commercial Markets segment revenues grew 12% year over year to $264 million, reflecting strong performance at Platts. The segment's adjusted operating profit went up 20% to $92 million.

Financial Aspects

McGraw-Hill Financial ended the quarter with cash and equivalents of $1,481 million, and long-term debt of $3,468 million. The company incurred capital expenditures of $139 million and generated negative free cash flow from continuing operations of $48 million.

During the quarter, McGraw-Hill Financial repurchased 5 million shares, taking its total buybacks for 2015 to 10 million shares. The company has 35 million shares left under the current buyback authorization. Additionally, McGraw Hill hiked its quarterly cash dividend by 9.1% to 36 cents per share, which will be payable on Mar 10, 2016, to stockholders on record as of Feb 25.

In 2015, the company paid dividends worth nearly 363 million, while it spent about $1.0 billion in share buybacks.

Other Developments & Outlook

The company intends to sell J.D. Power and expects to close the sale in 2016. Also, it plans to include deal-related amortization adjustments in calculating its non-GAAP results in 2016. Amortization expense is envisioned to be $98 million in 2016.

Moreover, the company is well on track with SNL's integration and expects to generate synergies worth roughly $100 million. In this regard, the company anticipates realizing considerable synergies from 2016.

The company now expects earnings for 2016 in the band of 5.00 to $5.15 per share, compared to the previous guidance of $4.45–$4.50. The Zacks Consensus Estimate is currently pegged at $4.86 per share.

Revenues for 2016 are projected to grow in mid-to-high single-digits.

Zacks Rank

McGraw-Hill Financial currently carries a Zacks Rank #4 (Sell) which is subject to change following the better-than-expected fourth-quarter results. Some better-ranked stocks worth considering are Emergent Capital, Inc. EMG, General Finance Corp. GFN and On Deck Capital, Inc. ONDK. All these stocks carry a Zacks Rank #2 (Buy).

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