McGraw Hill Financial, Inc. (MHFI) posted yet another quarter of better-than-expected results. Its top and bottom lines in second-quarter 2014 surpassed the Zacks Consensus Estimate. The company’s adjusted earnings of $1.06 per share from continuing operations came 15% higher than the year-ago quarter as well as beat the Zacks Consensus Estimate of 98 cents.
Total revenue of this Zacks Rank #2 (Buy) stock increased 8% year over year to $1,346 million owing to strong performance at the company’s segments. Moreover, revenues for the quarter were well ahead of the Zacks Consensus Estimate of $1,292 million.
Buoyed by robust second quarter performance, McGraw Hill Financial raised its 2014 earnings guidance. The company now expects adjusted earnings in the range of $3.80–$3.90 per share, up from $3.75–$3.85 forecasted earlier. The current Zacks Consensus Estimate for 2014 stands at $3.80 per share.
Segment Details
Standard & Poor’s Ratings Services segment revenues increased 11% year over year to $664 million while its operating profit grew 15% to $308 million.
Transaction revenues, which include ratings of publicly issued debt and bank loan as well as corporate credit estimates, jumped 14% from the year-ago quarter to $327 million. Further, non-transaction revenues, which include annual contracts, surveillance fees and subscriptions, rose 8%. Region-wise, the segment’s domestic revenue increased 10% while international revenues grew 12%.
S&P Capital IQ segment revenues grew 7% year over year to $307 million. Excluding ongoing portfolio restructuring, organic revenues rose 8%. S&P Capital IQ's international revenues increased 9% to $106 million. Moreover, the segment’s operating income rose 10% to $54 million.
S&P Dow Jones Indices revenues rose 8% from second quarter 2013 to $133 million in the said quarter, driven by growth in assets under management (AUM) in exchange-traded funds. The segment’s operating income increased 6% to $82 million.
The company noted that AUM in exchange-traded funds based on the S&P Dow Jones indices rose 32% to $719 billion at the end of the quarter.
Commodities & Commercial Markets segment revenues inched up 1% year over year to $263 million, reflecting strong performance at Platts, which witnessed a 9% revenue increase to $149 million. Revenues at Commercial Markets fell 7%. Segment operating income remained flat year over year at $83 million.
Financial Aspects
McGraw-Hill Financial ended the quarter with cash and equivalents of $1,617 million and long-term debt of $799 million. During the first six months of 2014, the company incurred capital expenditures of $37 million and generated free cash flow of $392 million.
During the first quarter, McGraw-Hill Financial bought back 2.2 million shares and has 45.6 million shares left to be repurchased under the current share buyback authorization.
Our Take
McGraw-Hill Financial remains well positioned in major market sectors and will likely benefit from its strategic investments in businesses to generate long-term profitability. The company is restructuring its portfolio of businesses to concentrate more on high-growth operations, thereby enhancing shareholders’ value through proper capital allocation.
Despite these measures, rising competition from peers such as Fitch, FactSet Research Systems Inc. (FDS), Moody’s Corp. (MCO) and Dun & Bradstreet (DNB) remains a concern.
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