Investors have soured on Mcgraw-Hill Companies Inc (NYSE:MHP) since the U.S. Department of Justice announced it would pursue a civil lawsuit against the company’s credit ratings unit, Standard & Poor’s (S&P). Moody’s Corporation (NYSE:MCO), S&P’s primary competitor and a Warren Buffett favorite, is under similar pressure from a government looking to make a public display of justice.
However, Mcgraw-Hill Companies Inc (NYSE:MHP)’s collection of wide-moat businesses will likely prove undervalued even if a large settlement is reached.
Unique collection of businesses
In addition to S&P, Mcgraw-Hill Companies Inc (NYSE:MHP) owns well-known brands like Capital IQ and J.D. Power. But S&P is the biggest contributor to profits, therefore it is the most important business to understand.
S&P is the top credit ratings provider worldwide — a position that is protected by regulations that discourage new entrants. The rating agency’s primary competitor is Moody’s Corporation (NYSE:MCO), which enjoys the same pricing power and stability that comes with a regulated oligopoly.
Although both S&P and Moody’s Corporation (NYSE:MCO) brands have been tarnished in the public eye due to wildly optimistic ratings during the credit boom, the agencies’ competitive position has not been altered one iota. Therefore, except for settlements with the Department of Justice, investors can expect both companies to continue earning high and stable profits for years to come.
After S&P, Mcgraw-Hill Companies Inc (NYSE:MHP)’s next most important asset is Capital IQ. Capital IQ’s primary competitor is FactSet Research Systems Inc. (NYSE:FDS). Although the two compete with Bloomberg and Reuters in some ways, as a rule, most institutional users have either Capital IQ or FactSet — or both.
FactSet Research Systems Inc. (NYSE:FDS) is a fast-growing recurring-revenue business. It is highly integrated into customers’ operations, which creates a sticky customer base. For instance, customers often use Excel spreadsheets set up specifically for FactSet Research Systems Inc. (NYSE:FDS) data; it is not a simple task to just switch everything over to Capital IQ.
Of course, Capital IQ enjoys the same benefits of recurring revenue and customer stickiness. This is what makes it such a valuable asset for McGraw-Hill.
Mcgraw-Hill Companies Inc (NYSE:MHP) recently sold its education business to Apollo Global Management LLC (NYSE:APO) for $2.4 billion in cash. The cash enables the company to pay off short-term debt and accelerate share repurchases.