Financial services decline hurts McGraw-Hill's 1Q profit

Email|Print|Single Page| Text size – + By Jennifer L. Malloy

AP Business Writer / April 29, 2008

NEW YORK—McGraw-Hill Cos., which publishes textbooks and owns credit ratings agency Standard & Poor's, said Tuesday its first-quarter profit tumbled 44 percent on a sharp decline in financial services revenue, and lowered its full-year forecast.

Net income for the three months ended March 31 fell to $81.1 million, or 25 cents per share, from year-ago profit of $143.8 million, or 40 cents per share, which included a $10.3 million gain on the sale of a mutual fund data business.

Revenue declined 6 percent to $1.22 billion from $1.3 billion, on a steep drop in structured finance revenue in Standard & Poor's Credit Market Services and lower school education sales.

Analysts surveyed by Thomson Financial expected earnings per share of 23 cents on revenue of $1.22 billion.

McGraw-Hill said its financial services revenue fell 12 percent to $644.3 million, with revenue for Standard & Poor's Credit Market Services declining 22 percent to $427.3 million as public bond issues dropped off amid global market turmoil.

The credit ratings industry, dominated by S&P, Moody's Investors Service and Fitch Ratings, has been sharply criticized for failing to accurately assess and warn investors about the risks that mortgage investments posed to financial markets.

The credit crisis has led to more than $200 billion in write-downs over the last year. The outcry has been so great that senators last week suggested the government suspend credit rating agencies' government licenses if they consistently give ratings that turn out to be inaccurate.

In a statement, Chairman, President and Chief Executive Harold McGraw III said the quarter's 56 percent decline in transaction revenue for S&P Credit Market Services reflects plunging new issue volume in the U.S. and European bond markets.

In the U.S., total new issue dollar volume declined 56 percent, with mortgage-backed securities off 94 percent and collateralized debt obligations (CDOs) falling 91 percent. McGraw-Hill also said revenue from ratings and services not directly linked to new public debt issues dropped 26 percent to $108.6 million due to much lower volume in bank loan and derivative products ratings.

The company's information and media segment generated revenue of $243.4 million, up 3 percent year-over-year, and sales in the B2B segment, which includes BusinessWeek, J.D. Power and Associates and Platts, edged up nearly 4 percent to $219.7 million.

But revenue for McGraw-Hill School Education Group declined 5 percent to $138.8 million.

"Revenue in the seasonally slow first quarter for the elementary-high school market depends more on purchases of fill-in copies and supplemental materials than on new business," said McGraw. "Last year, the McGraw-Hill School Education Group benefited from early ordering by North Carolina. Despite a good start in this year's 6-12 social studies and business education adoptions, our first-quarter results in North Carolina did not match last year's success."

Looking ahead, McGraw-Hill said financial market uncertainty and a weakening economy present challenges for the company this year.

"If the steep drop we experienced in the first quarter in structured finance continues for the rest of the year, revenue at the Financial Services segment would decline 7 percent to 9 percent," McGraw added. The company reaffirmed expectations for revenue growth of 6 percent to 8 percent in its education and information and media segments.

McGraw-Hill forecast full-year earnings per share in the $2.65 to $2.75 range, well below Wall Street's average estimate of $2.87 and less than the 3 percent to 5 percent growth it had predicted in January.

Goldman Sachs analyst Peter Appert said the quarter was weak, as predicted, but the outperformance of the S&P unit relative to his expectations gives "added confidence in the company's ability to manage through the down cycle."

In a note to clients, Appert said S&P's results held up much better than those of its main competitor, Moody's, and the education segment's seasonal loss was slightly smaller then he had modeled.

Lehman Brothers' Craig Huber maintained an "Overweight" rating and $47 price target on the stock, saying that given fixed income market conditions, McGraw-Hill did the prudent thing in lowering earnings per share guidance.

In late morning trading, shares slipped 9 cents to $40.30 on lower-than-average volume.