Financial services and educational publishing firm McGraw-Hill (NYSE:MHP) finally decided to split its operations into two separately-traded public companies. The move was announced late last year. The market has awarded the stock with strong performance and calls into question how each new stock might trade once the split occurs.
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Revenues increased 6% to about $1.3 billion. McGraw-Hill operates two disparate businesses, which it will actually be splitting into separate companies by the end of the year. McGraw-Hill Financial is better known through its Standard & Poor’s brand name, including the flagship credit ratings that competes with archrival Moody’s (NYSE:MCO), as well as Morningstar (Nasdaq:MORN), the last of which has tried to break into the space.
This unit also offers stock index services, as well as a financial data platform called S&P Capital IQ for investment analysts. Total sales advanced 8% to just over $1 billion while operating profits advanced 10% to $357 million. The other unit, McGraw-Hill Education, saw revenues fall 2% to $296 million and reported a loss of $65 million, though this represented an improvement of 13% from last year’s first quarter. This unit offers educational textbooks and has been struggling in the face of the move to digital content, as well as cutbacks from education departments across the country.
Outlook and Valuation
For the year, McGraw-Hill expects adjusted earnings between $3.25 and $3.35 per diluted share. This will be driven by the financial segment, though educational trends could continue to improve. Analysts project sales growth of over 4% and total sales of around $6.5 billion.
The current share price is just below $48 per share and equates to a forward P/E of about roughly 12.89. For comparison purposes, Moody’s trades at a forward multiple of 13.97. Rival publisher Pearson plc (NYSE:PSO) trades at 12.24
The Bottom Line
McGraw-Hills stock is up more than 15% since the corporate break up was announced on December 7. The overall market is up less than 10% over this period. For McGraw-Hill, the strong move likely already discounts any valuation improvement the financial segment is awarded once it is separated out. In contrast, the education unit could continue to struggle and be sold off by shareholders that receive both post spinoff. At this point, it might make sense to wait and see how each separate company trades on the market, though those that foresee a strong move in the financial unit could see holding the educational segment as worth the risk.