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McGraw Hill (MHFI) Q1 Earnings Top: Will the Stock Gain?

McGraw Hill Financial, Inc.’s MHFI adjusted earnings per share of $1.20 increased 8% from the year-ago quarter and also beat the Zacks Consensus Estimate of $1.15.

Revenues grew 5% year over year to $1,341 million but missed the Zacks Consensus Estimate of $1,367 million. The company’s top-line growth was supported by strong performances across S&P Global Market Intelligence (previously known as 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 130 basis points (bps) to 41.1%.

Segment Details

Standard & Poor’s Ratings Services segment revenues declined 9% year over year to $552 million. The deterioration stemmed from a fall in global issuance as well as foreign exchange rate. Adjusted operating profit decreased 12% to $252 million, while adjusted margin contracted 160 bps to 46%.

Transaction revenues, which include ratings of publicly issued debt and bank loan as well as corporate credit estimates, plunged 22% from the year-ago quarter to $225 million. Weak global bond issuance mainly attributed to the downside.

However, non-transaction revenues, which include annual contracts, surveillance fees and subscriptions, increased 3% to $327 million. On a currency-neutral basis, non-transaction revenues jumped 5%, fuelled by strength in surveillance fees, along with growth at CRISIL.

Region-wise, the segment’s domestic and international revenues declined 6% and 12%, respectively.

Market Intelligence revenues increased 27% year over year to $407 million. The segment’s adjusted operating profit soared 81% to $123 million, primarily due to the SNL acquisition as well as progress on integration-related synergies. On the other hand, adjusted operating margin expanded 900 bps to 30%.

S&P Dow Jones Indices revenues rose 5% to $151 million in the reported quarter. The segment’s adjusted operating profit increased 5% to $102 million.

Commodities & Commercial Markets segment revenues grew 13% year over year to $254 million. Platts recorded revenue growth of 10%, primarily due to robust growth in Global Trading Services. The segment’s adjusted operating profit increased 21% to $107 million.

Financial Aspects

McGraw-Hill Financial ended the quarter with cash and equivalents of $1,600 million, and long-term debt of $3,469 million. The company incurred capital expenditures of $16 million and generated free cash flow from continuing operations of $84 million.

Further, during the first quarter, McGraw Hill repurchased nearly 2.2 million shares for $200 million and paid dividends worth $96 million. Also, the company authorized additional buybacks of 33.3 million shares.

Other Developments & Outlook

The company repeated its previous guidance. The company expects 2016 earnings in the band of $5.00–$5.15 per share. The Zacks Consensus Estimate is currently pegged at $5.05 per share.

On Apr 15, 2016, McGraw Hill Financial entered into an agreement to divest its J.D. Power unit to a global alternative investments firm, XIO Group, for $1.1 billion.  The deal is expected to be closed by third-quarter 2016.

Zacks Rank and Stocks to Consider

McGraw-Hill Financial currently carries a Zacks Rank #4 (Sell). Some better-ranked stocks include are The Dun & Bradstreet Corporation DNB, FactSet Research Systems Inc. FDS and Verisk Analytics, Inc. VRSK. All these stocks hold a Zacks Rank #2 (Buy).

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DUN &BRADST-NEW (DNB): Free Stock Analysis Report
FACTSET RESH (FDS): Free Stock Analysis Report
VERISK ANALYTIC (VRSK): Free Stock Analysis Report
MCGRAW HILL FIN (MHFI): Free Stock Analysis Report
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