Shares of
The McGraw-Hill Companies, Inc.
(
MHP
) have been trending largely higher since posting its
second-quarter 2012 results, which marked the third straight
quarter with a positive earnings surprise. The company reached a
new 52-week high of $50.79 on August 29, jumping roughly 11% since
the results were announced.
With a long term earnings growth projection of 10.5% and a dividend
yield of 2%, this Zacks #2 Rank (Buy) textbook publisher and
financial information provider offers a lucrative option for
investors seeking both growth and income.
Mixed Second Quarter
On July 26, 2012, McGraw-Hill posted second-quarter 2012 earnings
of 85 cents per share that surpassed the Zacks Consensus Estimate
of 76 cents by 11.8% and the year-ago earnings of 68 cents by 25%.
The company stated that the strong performance of S&P Capital
IQ/S&P Indices and Commodities & Commercial boosted the
quarterly profits.
Management now expects 2012 earnings at the higher end of its
guidance between $3.25 and $3.35 per share.
Total revenue of $1,547 million fell short of the Zacks Consensus
Estimate at $1,587 million and edged down 1% year over year, due to
a revenue decline of 12% at McGraw-Hill Education, partly mitigated
by an increase of 5% in McGraw-Hill Financial. Operating income
rose 14% to $407 million, whereas operating margin expanded 330
basis points to 26.3%.
Earnings Momentum Climbing
The Zacks Consensus Estimate for 2012 inched up 1.2% to $3.36 per
share over the last 60 days, implying year-over-year growth of
15.3%. The current estimate is a penny above the high-end of the
company's guidance range.
For 2013, the Zacks Consensus Estimate is $3.79 per share,
increasing approximately 3.0% and marking year-over-year growth of
13.0%.
Dividend Portraying Strength
McGraw-Hill has regularly paid dividends since 1937. The company
has boosted its dividend at a compound annual rate of 9.6% since
1974. It is also repurchasing shares from time to time. The
quarterly dividend was most recently increased by 2% to 25.5 cents
per share in January 2012, which currently yields 2%. McGraw-Hill's
commitment toward enhancing shareholders' returns reflects its
sound liquidity position and well defined future prospects.
Valuation Stretched, Yet Lucrative
McGraw-Hill currently trades at a forward P/E of 15.14x, reflecting
a 6.1% premium to the peer group average of 14.27x. Again, its
price-to-book ratio of 8.21 is at a substantial premium to the peer
group average of 1.17. Given the long-term earnings growth
projection of 10.5%, the PEG ratio comes in at 1.4, above the
benchmark of 1 for a fairly priced stock but below the industry
average of 1.8. The return on equity (ROE) for the stock looks very
impressive. It has a trailing 12-month ROE of 50.6% compared with
14.3% for its peer group.
A Look at the Chart
After witnessing volatility in the past, the stock price has now
started to correlate with the increasing trend in estimates. The
year-to-date return for the stock is 13.1% compared with the
S&P 500's return of 10.4%.
Given the earnings growth potential, recent positive earnings
surprises and its ability to sustain dividend increases, the stock
has enough ingredients to lure investors. Furthermore, management's
decision of splitting the company into two, McGraw-Hill Financial
and McGraw-Hill Education is prudent in the current economic
environment, as it will provide the new entities a level playing
field in their core business areas.
New York-based McGraw-Hill is a diversified publisher and provider
of financial information and media services to customers. It is a
leading textbook publisher and owns one of the top credit rating
agencies (Standard & Poor's). It operates through two business
segments: McGraw-Hill Financial and McGraw-Hill Education.
McGraw-Hill, and has a market cap of $14.23 billion.
MCGRAW-HILL COS (MHP): Free Stock Analysis
Report
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