Ticker:
MHP
Sector:
Consumer/Non Cyclical
Industry: Food Processing
Recommendation:
Pricing
Price
52-wk High
52-wk Low
Key Statistics
Market Cap
Shares Out.
EPS (ttm)
P/E (ttm)
ROE
Profit Margin
Oper Margin
Gross Margin
Beta
Watch
$33.97 (4-26-10)
$36.94 (4-15-10)
$23.00 (9-25-09)
$10.69B
315M
$2.33
14.52
46.68%
12.7%
18.8%
21.41%
1.09
ANALYST NAME
Company Background
The McGraw-Hill Companies is driving the financial services,
education and business information markets through leading
brands such as Standard & Poor's, McGraw-Hill Education and
J.D. Power and Associates. Founded in 1888 when James H.
McGraw when he purchased the American Journal of Railway
Appliances, McGraw-Hill, has grown to one of the largest
producers of education, consumer and financial information,
(including many textbooks and the popular S&P 500 index.
Competitive Environment
MHP’s closest competitor is international media conglomerate
Pearson which is based in the UK. PSO produces textbooks, the
financial times, and has a 50% stake in both the FTSE group and
the Economist group. McGraw-Hill’s closest domestic
competitor is Moody’s Investors Services, (MCO)
Leslie Moore
Lcmp77@mail.missouri.edu
Lines of Business
McGraw-Hill operates 3 main lines of business, which the company describes as education,
financial services, and information and media. In its education function, McGraw-Hill produces
both print and online materials for all levels of education. McGraw-Hill is one of the largest
producers of textbooks.
Under Standard & Poor’s, its largest business segment, McGraw-Hill is a leading provider of
independent investment research, and indexes and ratings, which are used around the world by
financial decision makers to help create growth and mange wealth. Standard & Poor’s main
output includes credit ratings, equity research, indices, risk solutions, and investment data.
McGraw-Hill’s third and final arm is what it describes as information and media. This business
segment produces business analytics, trade publications, and consumer information through its
J.D Power and associates subsidiary. MHP also produces broadcasting which is currently shown
on four ABC affiliates across the country.
Financial analysis
Market Data
MHP
MCO
PSO
Current Price
$33.97
$26.29
$16.16
52 Week Rnage
$23-$36.94 $25.85-$26.33 $9.29-$16.33
Beta
1.09
1.25
0.67
Peg Ratio
1.61
1.19
3.65
Shares Outstanding
315M
30.5M
801.3M
P/E Ratio
14.73
14.74
19.78
EPS
1.78
0.82
0.82
Financial Data
MHP2009
MHP2008
MHP2007
ROA
11.64
12.86
16.35
ROE
48.68
53.35
Net Margin
12.27
12.58
Debt/Equity
0.65
0.93
0.75
0.9
0.61
0.6
Quick
MCO
PSO
24.32
4.64
47.29
NA
9.85
14.97
22.37
7.56
-
0.45
1..22
McGraw-Hill seems to be a pretty average company with respect to beta, net margin, and ROA.
When you take a look at the return on equity, however, this number seems to jump out at you. I
find this to be unusually high, and might have to do with the fact that capital expenditures have
been negative, especially when earnings per share are a conservative 1.78. Upon examining
McGraw-Hill’s balance sheet, however, I noticed this to be the result of what was a $4 billion
stock repurchase. Also, treasury stock is listed as negative, depressing stockholders equity,
which is driving ROE. This may have been driven by competitive action, as Moody’s
Corporation also lists negative treasury stock, and at close to the same amount as McGraw-Hill,
around $4 billion. MHP’s debt/equity ratio has fluctuated over the past couple of years, but the
most recent years ratio of .65 is not exceptionally risky, (as compared to 2008’s of .93). The
quick ratio, on the other hand, is a bit risky, at .9, and has increased from the past few years.
This may indicate an increased level of short term debt being used, even though total debt has
decreased from 2008.
An item from the statement of cash flows that has bothered me, however, is the fact that capital
expenditures have been negative for the past four years. Moody’s has also had negative capital
expenditures for the last four years, so it might be an industry norm, but nonetheless is
interesting to note.
When comparing McGraw-Hill to its two largest competitors, MHP Cleary beats Pearson, which
has a much lower ROE, ROA, and a much higher quick ratio and P/E ratio. When comparing
McGraw-Hill to Moody’s, it is a bit difficult to determine a clear winner. The return on assets is
pretty healthy at 24.32%. But has no usable return on equity metric, (as attributed to negative
overall equity on the balance sheet.
Stock Performance
You can observe either by looking at the 5 year or 2 year chart that the stock price for MGH has been
relatively volatile. While it has generally followed the S&P over the last 5 years, the S&P 500 MCO, and
PSO have all outperformed MGH.
5 Year Performance
2 Year Performance
Valuation
I began my evaluation using the Warren Buffet Owner Earnings Model. While I found this
application to the company fundamentally flawed in this particular case, I have included it here
for sake of consistency with the other reports
Discount Rate
In order to calculate a discount rate we must look at the risk free rate, beta, and the equity market
risk
premium. Using the beta of 1.09 and risk free rate of .16\% (current 3 month t-bill rate) and a
market return of 10% we can calculate a discount rate of
k =.00147+ 1.09*(.1-.0016) = 11%
This gives me a discount rate of 11% just slightly higher than the market, as attributed to its
slightly above average beta.
Growth Rates
The 5 year average growth rate in EPS has been 3.5% for the company, which is the growth rate
I used from 2010-2015, and dropped it down to 3% for the perpetuity.
Intrinsic Value
After setting it up the discount rates, my model gave me a value of $33.39 per share, which is
about $.60 under what it is selling for right now, putting it right in the money according to my
intrinsic valuation. sing a sensitivity analysis you can see that a discount rate does make the
stock undervalued, however, I find a discount rate that low inappropriate
Discount Rate
Intrinsic Value
7%
$64.84
9%
$43.79
11%
$33.36
13%
$27.14
15%
$23.02
Two-Stage Discounted Free Cash Flow Valuation Model (aka Warren Buffett Way Owners' Earnings Discount Model)
assuming discount rate (k) of
Free Cash Flow ("owner earnings") in 2009:
Net Income
Average Increase in Working Capital (subtract)
Depreciation (add)
Amortization (add)
Average Capital Expenditures (subtract)
Free Cash Flow (Owner Earnings)
11.00%
$
$
$
$
$
$
FIRST STAGE
Prior Year Free Cash Flow
First Stage Growth Rate (add)
Free Cash Flow
Discounted Value per annum
$
$
Sum of present value of owner earnings
730.50
(420.00)
165.48
269.29
745.27
Year:
2010
2011
2012
2013
2014
2015
745.3 $ 771.4 $ 798.4 $ 826.3 $ 855.2 $ 885.1 $
3.5%
3.5%
3.5%
3.5%
3.5%
3.5%
771.4 $ 798.4 $ 826.3 $ 855.2 $ 885.1 $ 916.1 $
$771.4
$719.2
$670.6
$625.3
$583.1
$543.7
$5,744.7
SECOND STAGE
Residual Value
Free Cash Flow in year 10
Second Stage Growth Rate (g) (add)
Free Cash Flow in year 11
Capitalization rate (k-g)
Value at end of year 10
Present Value of Residual
Intrinsic Value of Company
Shares outstanding assuming dilution
Intrinsic Value per share
$
$
$
1,051.3
3.00%
1,082.8
8.00%
13,535.19
$4,766.88
$10,511.54
315.14
$33.36
2016
916.1 $
3.5%
948.2 $
$506.9
2017
948.2 $
3.5%
981.4 $
$472.7
2018
981.4 $
3.5%
1,015.7 $
$440.8
2019
1,015.7
3.5%
1,051.3
$411.0
Analyst expectations
The mean target from analyst for the stock is $41.57 per share, with the high target being $45
and the low target $35. There are two strong buys, four buys, 4 holds, and no underperform/sells
from the analyst at Thompson/ First call, (listed on Morningstar and Yahoo Finance).
Recommendation: Watch
I recommend a watch for several reasons. Although the analyst from Thompson/Reuters seem to
be pretty optimistic about the stock, my intrinsic value $33.36 puts the stock at about $.30 under
what it is currently selling at, so it is not currently undervalued. The return on equity for this
stock was excellent for 2009; however I feel that the market has already absorbed this, since the
stock price has risen from $26 in September. The EPS is likely as a result of increase in treasury
stock as result of a stock buyback, and does not translate into an increase in cash flows. I also do
not feel that this stock is a good long term hold either, as it has underperformed the S&P and
competitors in the last two years. I feel that this may be a good stock to invest in for a semester
if the market devalues the stock, whoever, and so recommend a watch for MHP
Income Statement
12 months
In Millions of USD (except for
ending 2009per share items)
12-31
Revenue
5,951.78
Other Revenue, Total
Total Revenue
5,951.78
Cost of Revenue, Total
2,386.01
Gross Profit
3,565.78
Selling/General/Admin.
2,141.25
Expenses, Total
Research & Development
Depreciation/Amortization
165.48
Interest Expense(Income) - Net
Operating
Unusual Expense (Income)
3.30
Other Operating Expenses, Total Total Operating Expense
4,696.05
Operating Income
1,255.74
Interest Income(Expense), Net
-76.87
Non-Operating
Gain (Loss) on Sale of Assets
Other, Net
Income Before Tax
1,178.87
Income After Tax
749.76
Minority Interest
-19.26
Equity In Affiliates
Net Income Before Extra. Items 730.50
Accounting Change
Discontinued Operations
Extraordinary Item
Net Income
730.50
Preferred Dividends
Income Available to Common
730.50
Excl. Extra Items
Income Available to Common
730.50
Incl. Extra Items
Basic Weighted Average Shares Basic EPS Excluding
-
12 months
ending 200812-31
6,355.06
6,355.06
2,518.43
3,836.62
12 months
ending 200712-31
6,772.28
6,772.28
2,527.60
4,244.68
12 months
ending 200612-31
6,255.14
6,255.14
2,387.25
3,867.89
2,283.59
2,424.09
2,287.85
178.35
160.99
161.59
-
-
-
0.00
4,980.37
1,374.68
-17.30
5,095.37
1,676.91
0.00
4,836.68
1,418.45
-75.62
-40.58
-13.63
1,299.06
819.37
-19.87
799.49
799.49
-
1,636.33
1,027.36
-13.80
1,013.56
1,013.56
-
0.00
1,404.82
882.23
882.23
882.23
-
799.49
1,013.56
882.23
799.49
1,013.56
882.23
-
-
-
12 months
12 months
12 months
12 months
In Millions of USD (except for
ending 2009- ending 2008- ending 2007- ending 2006per share items)
12-31
12-31
12-31
12-31
Extraordinary Items
Basic EPS Including
Extraordinary Items
Dilution Adjustment
Diluted Weighted Average Shares 313.30
318.69
344.79
366.88
Diluted EPS Excluding
2.33
2.51
2.94
2.40
Extraordinary Items
Diluted EPS Including
Extraordinary Items
Dividends per Share - Common
0.90
0.88
0.82
0.73
Stock Primary Issue
Gross Dividends - Common
Stock
Net Income after Stock Based
Comp. Expense
Basic EPS after Stock Based
Comp. Expense
Diluted EPS after Stock Based
Comp. Expense
Depreciation, Supplemental
Total Special Items
Normalized Income Before Taxes Effect of Special Items on Income
Taxes
Income Taxes Ex. Impact of
Special Items
Normalized Income After Taxes Normalized Income Avail to
Common
Basic Normalized EPS
Diluted Normalized EPS
2.39
2.59
2.91
2.40
Balance Sheet
In Millions of USD (except for
As of
As of
As of
As of
As of
per share items)
2009-12-31 2009-09-30 2009-06-30 2009-03-31 2008-12-31
Cash & Equivalents
1,209.93
957.26
556.13
496.80
471.67
Short Term Investments
24.60
Cash and Short Term Investments 1,234.53
957.26
556.13
496.80
471.67
Accounts Receivable - Trade, Net 969.66
1,174.57
1,049.45
832.34
1,060.86
In Millions of USD (except for
per share items)
Receivables - Other
Total Receivables, Net
Total Inventory
Prepaid Expenses
Other Current Assets, Total
Total Current Assets
Property/Plant/Equipment, Total Gross
Accumulated Depreciation, Total
Goodwill, Net
Intangibles, Net
Long Term Investments
Other Long Term Assets, Total
Total Assets
Accounts Payable
Accrued Expenses
Notes Payable/Short Term Debt
Current Port. of LT Debt/Capital
Leases
Other Current liabilities, Total
Total Current Liabilities
Long Term Debt
Capital Lease Obligations
Total Long Term Debt
Total Debt
Deferred Income Tax
Minority Interest
Other Liabilities, Total
Total Liabilities
Redeemable Preferred Stock,
Total
Preferred Stock - Non
Redeemable, Net
Common Stock, Total
Additional Paid-In Capital
Retained Earnings (Accumulated
Deficit)
As of
As of
2009-12-31 2009-09-30
969.66
1,174.57
301.23
339.00
152.56
100.03
278.41
286.07
2,936.40
2,856.94
As of
As of
2009-06-30 2009-03-31
1,049.45
832.34
389.88
386.40
118.12
131.11
283.63
281.27
2,397.22
2,127.93
As of
2008-12-31
1,060.86
369.68
115.15
285.36
2,302.72
1,570.45
1,580.61
1,568.06
1,553.90
1,573.95
-990.65
1,690.51
999.58
166.38
102.59
6,475.25
301.83
564.83
0.02
-1,005.49
1,691.84
1,014.38
170.28
106.91
6,415.47
314.57
484.48
0.02
-984.01
1,688.75
1,105.88
171.22
110.90
6,058.02
285.51
376.26
89.62
-957.25
1,702.15
1,144.03
169.33
109.32
5,849.42
275.46
325.56
159.92
-952.89
1,703.24
1,143.66
176.90
132.55
6,080.14
337.46
531.99
70.02
-
-
-
-
-
1,585.27
2,451.95
1,197.79
1,197.79
1,197.81
9.96
81.89
886.36
4,627.96
1,717.00
2,516.07
1,197.75
1,197.75
1,197.77
3.36
76.23
945.05
4,738.46
1,666.20
2,417.59
1,197.70
1,197.70
1,287.32
3.15
72.58
973.55
4,664.58
1,593.08
2,354.02
1,197.66
1,197.66
1,357.58
2.09
70.78
989.67
4,614.21
1,591.24
2,530.70
1,197.61
1,197.61
1,267.63
3.41
70.53
995.55
4,797.81
-
-
-
-
-
-
-
-
-
-
411.71
5.12
411.71
4.11
411.71
15.99
411.71
11.09
411.71
55.15
6,522.61
6,421.32
6,156.14
6,062.95
6,070.79
In Millions of USD (except for
per share items)
Treasury Stock - Common
Other Equity, Total
Total Equity
Total Liabilities & Shareholders'
Equity
Shares Outs - Common Stock
Primary Issue
Total Common Shares
Outstanding
Sources
As of
As of
2009-12-31 2009-09-30
-4,749.14 -4,770.45
-343.02
-389.68
1,847.29
1,677.01
As of
As of
2009-06-30 2009-03-31
-4,780.11 -4,792.90
-410.29
-457.64
1,393.44
1,235.21
As of
2008-12-31
-4,811.29
-444.02
1,282.34
6,475.25
6,415.47
6,058.02
5,849.42
6,080.14
-
-
-
-
-
315.34
314.90
314.80
314.50
314.41
http://www.mcgraw-hill.com/
http://www.google.com/finance?q=NYSE:MCO
http://www.google.com/finance?q=PSO
http://www.google.com/finance?q=mhp
www.morningstar.com
http://finance.yahoo.com/q?s=MHP
Thompson/Reuters, (retrieved from yahoo finance)