Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

The McGraw-Hill Companies, Inc. (MHP) Is Still a Good Buy Despite S&P Lawsuit

Despite the recent lawsuit filed by the Justice Department against The McGraw-Hill Companies, Inc. (NYSE:MHP) and Standard & Poor’s, which alleges the company knowingly issued inflated positive ratings to mortgage securities and lenders from September 2004 to October 2007, it’s unlikely that the outcome of the suit will negatively impact the long-term stability of the company or the ratings industry as a whole.

Both McGraw-Hill and Moody’s Corporation (NYSE:MCO) stock prices have already dropped as investors learned of the suit last week, apparently amid fears of billions of dollars in fines and restitution coupled with the potential for an endless stream of subsequent lawsuits. While the short-term outlook for the world’s largest ratings companies may appear bleak, these stocks still have a place in portfolios with time horizons beyond the next few years.

The McGraw-Hill Companies, Inc.It’s no secret that the public has a long-term memory deficiency when it comes to corporate scandals, or any scandal for that matter. The case against McGraw-Hill will, like the countless charges that have been filed over the years against other companies for various egregious or negligent actions, fade into the background. The public eye will soon be focused on the next CEO screw up, the politician’s extramarital affair or some other Wall Street mashup of The Young & The Restless.

However, the public’s insatiable thirst for new gossip is not the only reason that McGraw-Hill will survive the DOJ’s lawsuit. The company’s financials are strong, so even if the case isn’t settled for a lesser amount and the court orders McGraw-Hill to pay the proposed $5 billion fine, it’s unlikely that the penalty will be little more than collateral damage. Business will continue, and the mortgage ratings scandal will become a mere hiccup on the timeline of the company’s century-long history. Even in the face of the government’s fraud lawsuit, and the subsequent 25% decline in share price, the company still reported earnings per share expectations for 2013 to range from $3.10 to $3.20.

There’s also the possibility that this case could be settled for a lesser amount, or dragged through the legal process at such a snail’s pace that by the time any money is actually due from the defendant, necessary preparations will have already been completed to adequately protect the company’s balance sheet. Undoubtedly, Moody’s is already engaging in similar economic shuffling to prepare for their own battle with the Justice Department.

Aside from the general public’s short-term supermarket tabloid mentality, plus the billions of dollars in cash and market capitalization possessed by the ratings companies, the simple fact that Standard & Poor’s and Moody’s, and to a lesser extent, Fitch, have a monopoly on the ratings industry will assure their continued existence regardless of the outcome of the Justice Department’s fraud lawsuit. Over 96% of ratings are issued by these three companies, and the immense obstacles a smaller competitor would have to overcome to gain SEC approval before selling similar ratings make it highly unlikely that S&P or Moody’s will ever be replaced.

The article McGraw-Hill Is Still a Good Buy Despite S&P Lawsuit originally appeared on and is written by Greg Gambone.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!