McGraw-Hill Downgraded to Hold
Wednesday, July 16, 2008; Posted: 07:10 AM
Jul 16, 2008 (Zacks Investment Research via COMTEX) --
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PowerRating -- The outlook for McGraw-Hill Companies, Inc.'s (MHP) Financial Services segment is murky as the mortgage-backed securities and collateralized debt obligation markets have dried up. This segment contributes 45 percent of total company revenue.
Financial Services operating income is shrinking at mid-20's rate and we don't think it will trough until at least the fourth quarter, and then it may likely remain weak through 2009. This weakness should be partially offset by mid-to-high single-digit growth in both the Education segment and Information & Media segment.
Rising mortgage defaults and the resultant drop-off in the U.S. residential mortgage-backed securities market will not likely reverse itself for many quarters. Having been fueled by adjustable rate, interest only and negative amortization loans, we have long thought the housing market was overvalued, and expect the weakness to continue through 2009.
Thus, we expect McGraw-Hill's rating business (Standard & Poor's), which derives much of its revenue from reviewing, and rating of corporate bonds and structured finance deals, to shrink near-term and drive mid-teens drop in operating income for the financial services segment. And we think it will take many quarters for the mortgage backed securities market to open again and S&P's rating revenue to recover.
Although the stock is trading in-line with our estimate of its 5-year growth rates, in our view, visibility in Financial Services is low and therefore creates additional risk to our estimates. Therefore, we downgrade the shares to Hold from Buy.
Sumit Singh contributed to this report.
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