McGraw-Hill Increases Margins, Readies for Spinoff

Apparently, other companies haven't gotten the memo telling them not to announce earnings within a week of Apple. That's too bad, because a lot of good things happen at places like McGraw-Hill (NYS: MHP) , and those good things tend to get lost in all the Apple noise. If you ignore the static, you can get a clear picture of what McGraw-Hill has on tap for 2012, and how investors are going to be rewarded.

McGraw-Hill released its Q1 2012 earnings this week and reported a revenue increase of 6% on Q1 2011. The company beat earnings per share estimates by $0.03, coming in at $0.51 per share. Free cash flow improved as well rising 6% to $112 million.

Where was the money, Lebowski?
The company has plans to split itself in two later this year, with the S&P Ratings agency and Capital IQ being retained in McGraw-Hill Financial, while the educational segment gets spun off into McGraw-Hill Education. Apparently, "McGraw-Hill Creative Names for Businesses" is no longer operating. Those two segments both increased their Q1 bottom line. Financial grew operating profit 10% to 327 million, while Education improved its loss by 13%.

Financial received support from its Commodities segment, which grew revenue by 13% and had an operating margin near 27%. Even though McGraw doesn't sell, trade, or find natural gas, it has profited from the attention being given to the commodity, by providing information and insights to customers. Regardless of whether natural gas succeeds as a replacement fuel, interest will continue to grow for some time, and McGraw-Hill seems well placed to take advantage of that business line.

The other highlight of the season was the relatively good but still losing Education segment. While it did increase operating margins, it continued to be hampered by the weak elementary and high school market. McGraw-Hill wants to use an increase in digital business to grow this segment, and it already has 40% of its higher-education revenue being provided by digital.

Tying the room together
I continue to like McGraw-Hill as a stock. The company has clear plans about its spinoff, and it has strongly denied having any interest in selling its educational segment to a competitor. The surprise increase in the Commodities business should continue as long as natural gas maintains its interest.

Along with that, the stock is well priced compared to competitors. Moody's (NYS: MCO) is the company's closest competitor in the ratings space, and it has a forward looking P/E of 14 compared with McGraw-Hill's 13. Pearson (NYS: PSO) competes in the educational space, with a forward P/E of 12.5.

Finally, Harold McGraw III said two excellent things at the beginning of the annual conference call. First off, he paid tribute to a former colleague who died earlier this year and did it in a meaningful way. I like to see that compassion in a CEO. Second, he said: "Our mission is never, nor never will be, about us. It will always be about our customers." I like that sentiment. I like this stock.

McGraw-Hill is just one of about a zillion companies reporting earnings right now. Most of them aren't worth the 30 minutes it would take you to read through all the manager-speak. Save yourself some time and read the Fool's free report "5 Stocks Investors Need to Watch This Earnings Season" to get the lowdown on the best stocks to watch. Get your copy before the season ends.

At the time thisarticle was published Fool contributorAndrew Marderdoesn't own in any of the stocks mentioned in this article. The Motley Fool owns shares of Apple.Motley Fool newsletter services have recommended buying shares of Moody's and Apple and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.