The McGraw-Hill Companies (NYSE: MHP), a distributor of business information and educational materials which counts Scholastic (NASDAQ: SCHL) as a related stock, issued third-quarter results earlier today. Sales contracted over 8%. Net income on a dollar basis dropped almost 14%. Earnings per diluted share decreased a very unlucky 13% to $1.07. At least expectations were taken out. Earnings.com indicates a beat of two pennies for per-share profit.
The declines are pretty understandable. When you think about McGraw-Hill, you understand fairly quickly that the company's business model is tied closely to the economy. Education markets must be tough given all the budget cuts happening in school systems across the country. Plus, spending by administrators is probably done these days very slowly and carefully.
Then there's the group dedicated to financial services, which saw an overall drop in operating profit. One of McGraw Hill's most valuable trademarks, Standard & Poor's, depends on robust action on Wall Street for success. A bit of good news on that front: according to management, Standard & Poor's Credit Market Services experienced a rise in its top line for the first time since the third quarter of 2007.
Still, all is not well with McGraw-Hill. Shareholders who read through the press release will surely come away with a not-so-comforting feeling. In fact, the sales outlook worsened. Previous guidance suggested a drop between 5.5% and 6.5% would occur in the top line in 2009. Now, you should count on 7%. However, the company believes the previous income range of between $2.20 per share and $2.25 per share should hold, and that management should be able to deliver earnings at the high end.
Great. But I'm not going to buy on such news. McGraw Hill will indeed benefit as the economy turns around, but today, shares are trading down by 3.8% in the afternoon, and that doesn't exactly get me in the mood to buy. Plus, I'd rather get this one closer to a 52-week low. McGraw Hill has already made a move this year, and I just don't see the margin of safety given that the revenue picture is not looking well.
Disclosure: I don't own any company mentioned; positions can change without notice.
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