McGraw-Hill Murky On S&P Business

The McGraw-Hill Companies, Inc. (MHP) is a diversified publisher and provider of financial information, and also a provider of media services to customers in over 40 countries. The company is a leading textbook publisher and owns one of the top credit rating agencies (Standard & Poor’s). It has three business segments: McGraw-Hill Education, Financial Services and Information & Media.

The outlook for McGraw-Hill’s Financial Services (45% of revenue) segment is murky as the mortgage-backed securities and CDO markets have dried up. Financial Services operating income is shrinking at mid-20’s rate (down 22% in 2Q08) and we don’t think it will trough until at least 4Q08 and will likely remain weak through 2009.

This weakness in Financial Services should be partially offset by mid-to-high single-digit growth in both the Education segment (4% to 6% in 2008) and Information & Media segment (6% to 8%), as well as the company’s increased focus on non-transaction revenue. The stock is trading at a discount to our estimate of its 5-year growth rates and the yield is attractive (3.6%) but, in our view, visibility in Financial Services is low and therefore creates additional risk to our estimates.

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