McGraw Hill Financial Inc. Annual Valuation – 2014 $MHFI

145px-McGraw_Hill_Financial_New_LogoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Undervalued Companies for the Defensive Investor.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how McGraw Hill Financial Inc. (MHFI) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): McGraw Hill Financial, Inc. is a financial intelligence company. The Company is engaged in credit ratings, benchmarks and analytics for the global capital and commodity markets. The Company’s brands include Standard & Poor’s Ratings Services, S&P Capital IQ, S&P Dow Jones Indices, Platts, CRISIL, J.D. Power & Associates, and McGraw Hill Construction. The Company’s credit ratings, indices, price assessments and other capabilities provide clients with the intelligence to manage risk. Standard & Poor’s Ratings Services helps investors and markets participants measure and manage credit risk through credit ratings, research and analytics. In July 2014, QTS Realty Trust Inc acquired data center facility in East Windsor, New Jersey, from McGraw Hill Financial Inc. In July 2014, the Company’s Platts acquired Eclipse Energy Group, deepening its analytical expertise in European Gas, Power and Global LNG Markets.
MHFI Chart

MHFI data by YCharts

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years - PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
  6. Moderate PEmg ratio – PEmg is less than 20 - FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $81.93
MG Value $43.20
MG Opinion Overvalued
Value Based on 3% Growth $44.14
Value Based on 0% Growth $25.87
Market Implied Growth Rate 9.21%
Net Current Asset Value (NCAV) -$3.35
PEmg 26.92
Current Ratio 1.27
PB Ratio 10.24

Balance Sheet – 3/31/2014

Current Assets $2,864,000,000
Current Liabilities $2,254,000,000
Total Debt $799,000,000
Total Assets $6,011,000,000
Intangible Assets $2,449,000,000
Total Liabilities $3,794,000,000
Outstanding Shares 277,200,000

Earnings Per Share

2014 (estimate) $3.76
2013 $2.90
2012 $2.37
2011 $2.75
2010 $2.65
2009 $2.33
2008 $2.51
2007 $2.94
2006 $2.40
2005 $2.21
2004 $1.96

Earnings Per Share – ModernGraham

2014 (estimate) $3.04
2013 $2.66
2012 $2.53
2011 $2.62
2010 $2.56
2009 $2.50

Dividend History

MHFI Dividend Chart

MHFI Dividend data by YCharts

Conclusion:

McGraw Hill does not qualify for the Defensive Investor or the Enterprising Investor.  The Defensive Investor has issues with the low current ratio, the lack of earnings stability over the last ten years, and the high PEmg and PB ratios.  The Enterprising Investor is concerned with the high level of debt relative to the current assets.  As a result, value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities.  As for a valuation, the company appears to be overvalued after growing its EPSmg (normalized earnings) from $2.56 in 2010 to only an estimated $3.04 in 2014.  This low level of demonstrated growth does not support the market’s implied estimate of 9.21% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on McGraw Hill Financial (MHFI)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in McGraw Hill Financial (MHFI) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from wikipedia or the company website for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.


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