McGraw Hill Companies
As always our valuation follows Warren Buffett’s approach for the business review, and Benjamin Graham’s method for equity valuation. Please note our methods are clearly described on our website.
Business and Management Review
1) Is the business simple and understandable?
The McGraw-Hill Companies, Inc. is an information services provider serving the financial services, education and business information markets. Other markets include energy, construction, aerospace and defense, and marketing information services. It serves customers through a range of distribution channels, including printed books, magazines and newsletters, online via Internet Websites and digital platforms, through wireless and traditional on-air broadcasting, and through a variety of conferences and trade shows. The company’s basic business model is to sell these products to individuals and corporations and the company is susceptible to macroeconomic conditions.
2) Does the business have a consistent operating history?
The operating history of the company is strong given the analytical data provided below. Both earnings and dividends have grown over time. Being in the publishing industry the demand for their product is fairly predictable, and even with the emergence of digital delivery of the content, the company has been able to change with the times and alter their business model.
3) Does the business have favorable long term prospects?
Given the nature of the industry there will be continued pressure from digital delivery, but as long as they continue to innovate and move with technology they should be able to have the same success they have enjoyed. The textbook publishing division of the company should continue to have the success they have seen, especially considering that they have no competition in terms of other content providers besides other competing publishers.
4) Is management rationale?
With a very low debt to equity ratio we feel that management is not over leveraging their shareholders, and even could have missed opportunities in years past to take on more debt to expand for larger projects. With that being said, however, we still feel that management is acting in the best interests of shareholders. The company also states that they have returned over 5 billion in cash to their shareholders through dividends and share repurchases.
5) Is management candid with its shareholders?
The investor relation page is quite extensive and overall we are happy with the level of communication they have with shareholders. Typical information one would expect is present and easily available.
6) Does management resist the institutional imperative?
Given the low levels of debt and the dividend and share repurchase record, we fell they are resisting this urge.
Financial and Value Review
1) Size of firm
McGraw Hill’s market capitalization is about 24 billion which surpasses the 2 billion requirements.
2) Strong financial condition
McGraw Hill fails this test as their current ratio is below 2 (it is 1.16).
3) Earnings stability
The company passes this test as net income has been positive for the prior ten years.
4) Dividend record
The company passes this test as they have paid dividends for the past ten years.
5) Price to earnings analysis
With a P/E ratio of 28 it fails the test of being below 20.
6) Price to assets analysis
With a P/B of over 7 the company fails the test of being below 1.5.
1) Strong financial condition
Current ratio of the company fails the test.
2) Earnings stability
Company passes the test of having positive net income for the five years prior.
3) Dividend record
The company currently pays a divided, therefore, passes the test.
4) Earnings growth
Earnings are greater than five years prior; therefore, McGraw Hill passes the test.
Our valuation puts a fair price for the company at $32 a share showing they are quite overpriced purely on a valuation approach.
We agree in principle that the company is overpriced, but we do not feel the gap is as large as the valuation dictates. We would be comfortable paying a small premium to own this company and would put a fair value at $45 a share. Therefore, the company would need to reduce in share price significantly in order to meet our amended standards.
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