Earnings Preview: McGraw-Hill - Analyst Blog

The McGraw-Hill Companies Inc. (MHP), a publisher and provider of financial information and media services, is scheduled to report its fourth-quarter 2010 financial results on February 1, 2011. The current Zacks Consensus Estimate for the quarter is 51 cents a share. For the quarter under review, revenue is $1,495 million, according to the Zacks Consensus Estimate.

Third-Quarter 2010, a Synopsis

The McGraw-Hill Companies posted higher-than-expected third-quarter 2010 results on the heels of robust performance across Standard & Poor's (S&P's) services, U.S. elementary-high school and higher education markets, and global energy information products.

The quarterly earnings of $1.22 per share topped the Zacks Consensus Estimate of $1.09, and rose 14% from $1.07 in the prior-year quarter.

McGraw-Hill's total revenue of $1,979.8 handily beat the Zacks Consensus Revenue Estimate of $1,946 million, and jumped 5.5% from the prior-year quarter helped by growth in Education and Financial Services segments, but offset by a decline in its Information and Media segment.

Management Guided

McGraw-Hill at its last earnings call had forecast fiscal 2010 earnings to be at the high end of the guidance range of $2.60 to $2.65 per share versus $2.55 to $2.65 provided earlier.

Fourth-Quarter 2010 Zacks Consensus

Analysts considered by Zacks expect McGraw-Hill to post fourth-quarter 2010 earnings of 51 cents a share. The current Zacks Consensus Estimate remained flat with the prior-year quarter earnings. The current Zacks Consensus Estimates for the quarter range between 50 cents and 54 cents.

Zacks Agreement & Magnitude

Of the 7 analysts following the stock, only 1analyst revised the estimate upward in the last 30 days, having no material impact on the Zacks Consensus Estimate for fourth-quarter 2010. In the last 7 days, none of the analysts revisited their estimates leaving the Zacks Consensus Estimate unchanged.

Positive Earnings Surprise History

With respect to earnings surprises, McGraw-Hill has topped the Zacks Consensus Estimate over the last four quarters in the range of 1.7% to 32.0%. The average remained at 18.3%. This suggests that McGraw-Hill has beaten the Zacks Consensus Estimate by an average of 18.3% in the last four quarters. Given the past performance we expect the company to outperform the Zacks Consensus Estimate.

McGraw-Hill in Neutral Lane

McGraw-Hill has been gaining strength on the heels of robust performance across Standard & Poor's (S&P) services, U.S. elementary-high school and higher education markets, and global energy information products.

McGraw-Hill informed that increase in new issuance in the global high-yield bond market and robust growth in S&P indices benefited the Financial Services segment in third-quarter 2010, which grew 9.5% in revenue.

In both the higher education and professional markets, digital products and services are delivering double-digit gains. The demand for online study tools (e.g. McGraw-Hill Connect series) is increasing in the college and university markets. Due to a surge in enrollment in the U.S. colleges and universities, management expects the U.S. higher education market to rise by 8% to 10% in fiscal 2010.

McGraw-Hill indicated that state new adoption market will remain strong, but budgetary constraints will continue to impact elementary-high school market. The state new adoption market is expected to grow between $825 million and $875 million in fiscal year 2010 compared to $500 million in 2009 depending on state funding levels.

The company has also been prudently managing its cash flows returning much of its free cash to shareholders via share repurchases and dividends. McGraw-Hill has regularly paid dividends since 1937. Since 1974, the company has boosted its dividend at a compound annual dividend growth rate of 9.8% and is now among those S&P 500 companies (less than 25), which have raised dividend annually for the 38^th straight year.

New York-based McGraw-Hill raised its quarterly dividend by 6.4% to 25 cents from 23.5 cents. The increased dividend will be paid on March 10, 2011, to stockholders of record as on February 24, 2011. Increase in dividend reflects the company's sound financial position and well-defined future prospects.

Currently, we have a long-term Neutral rating on the stock. Moreover, McGraw-Hill, which competes with Pearson plc (PSO), holds a Zacks #3 Rank, which translates into a short-term Hold rating, and correlates with our long-term recommendation.

 
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