McGraw Hill Financial, Inc’s (MHFI) fourth-quarter 2014 adjusted earnings per share from continuing operations of 95 cents increased 23% from the year-ago quarter and also beat the Zacks Consensus Estimate of 91 cents.
Strong performance across the board led to a 7% increase in revenues to $1,290 million, which easily surpassed the Zacks Consensus Estimate of $1,280 million.
McGraw Hill Financial finally settled its long-standing legal dispute. The company paid $1.5 billion in legal settlements to various regulatory authorities, including the U.S. Department of Justice, to resolve the issue of deliberately providing high ratings in the 2004-2007 time frame to U.S. collateralized debt obligations and residential mortgage backed securities that underperformed and triggered off the housing market collapse.
As a result, including this legal charge and other one-time costs, the company posted loss per share of $3.71 from continuing operations as against earnings per share of 60 cents in the prior-year quarter.
Moreover, management expects 2015 revenues to grow in the mid-single digits as against growth of 7% registered for 2014. Earnings are expected to be around $4.35–$4.45 per share compared with adjusted earnings of $3.88 reported in 2014. The current Zacks Consensus estimate is pegged at $4.34 per share and is likely to be revised upwards.
Segment Details
Standard & Poor’s Ratings Services segment revenues increased 8% year over year to $618 million. Adjusted operating profit grew 18% to $261 million.
Transaction revenues, which include ratings of publicly issued debt and bank loan as well as corporate credit estimates, jumped 12% from the year-ago quarter to $288 million. Further, non-transaction revenues, which include annual contracts, surveillance fees and subscriptions, rose 4%. Region-wise, the segment’s domestic revenue increased 15% while international revenues grew 1%.
S&P Capital IQ segment revenues grew 5% year over year to $318 million. Excluding portfolio restructuring, organic revenues rose 6%. S&P Capital IQ's international revenues increased 5% to $112 million. Moreover, the segment’s adjusted operating income rose 31% to $62 million.
S&P Dow Jones Indices revenues rose 8% to $140 million from the prior-year quarter, driven by growth in assets under management (AUM) in exchange-traded funds and higher exchange-traded derivative licensing fees. The segment’s adjusted operating income increased 87% to $64 million.
The company noted that AUM in exchange-traded funds based on the S&P Dow Jones indices rose 17% year over year, surpassing the $1 trillion mark for the first time.
Commodities & Commercial Markets segment revenues grew 8% year over year to $236 million, reflecting strong performance at Platts and J.D. Power. Segment adjusted operating income rose 4% to $76 million.
Financial Aspects
McGraw-Hill Financial ended the quarter with cash and equivalents of $2,497 million and long-term debt of $799 million. During 2014, the company incurred capital expenditures of $92 million and generated free cash flow of $1,033 million.
During the quarter, McGraw-Hill Financial did not repurchase any shares. It has 45.6 million shares left under the current share buyback authorization.
The company also announced a 10% hike in its quarterly dividend to 33 cents per share ($1.32 annually), payable on Mar 11, 2015 to shareholders as of Feb 25, 2015. .
Our Take
After divesting McGraw Hill Construction, the company has completed its portfolio restructuring. It is now focusing on its core business that would help it emerge as a leader among rating providers, benchmark providers, and analytics in the global capital and commodity markets. In addition, to aid its goal of emerging as a leader in the global analytics arena, the company has made strategic investments in businesses that are expected to help in achieving long-term profitability.
Moreover with the verdict out on the DOJ’s civil lawsuit, the company can finally breathe as sigh of relief. The only concern that remains now is the rising competition from peers, such as Fitch, FactSet Research Systems Inc. (FDS), Moody’s Corp. (MCO) and Dun & Bradstreet (DNB).
At present, McGraw Hill Financial is a Zacks Rank #3 (Hold) stock.
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