The McGraw-Hill Companies (MHP) is an information services and publishing company based in the US. Barry Rosenstein’s Jana Partners, Daniel Bubis’ Tetrem Capital Management and David Abrams’ Abrams Capital Management are fans of the company. MHP posted third quarter earnings of $1.86B, up from $1.58B in the second quarter of the year.
MHP recently announced that it would split into two separate entities – McGraw Hill Markets, which would be focused on financial information, and McGraw Hill Education, which would concentrate on publishing educational materials. The plan was proposed by Barry Rosenstein’s Jana Partners after it took a 2.9% activist stake in the company. On November 4, Jim Cramer recommended MHP as a buy on his show “Mad Money,” explaining that investors could make money on the company’s split. On November 4, MHP had closed at $42.49. It closed trading on Wednesday, November 9 at $41.82.
To get a better idea whether MHP is a buy, let’s look at the company in closer detail and compare it to its closest competitors – Pearson Plc (PSO), John Wiley & Sons Inc (JW-A) and Scholastic Corporation (SCHL).
First, we will look at the P/E ratio. This metric divides a company’s share price by its earnings per share – the lower the number, the better. P/E ratio indicates how many times its earnings a company is trading at. If the P/E ratio is high, the stock could be overpriced, so the lower the better. Of the companies we looked at, SCHL has the lowest forward P/E ratio at 11.12. MHP is next at 13.15, followed by JW-A at 14.03. PSO had the highest Forward P/E at 38.83.
We used beta as a measure of risk. A beta of 1.0 means that the stock moves with the market. The higher a stock’s beta, generally, the more volatile the stock, and, as a result, the more risky. A lower beta tends to indicate that the stock moves more independently from the market. PSO has the lowest beta of the companies we looked at. It has a beta of just 0.78. JW-A is next, with a beta of 0.81, followed by MHP at 1.07, and SCHL at 1.13.
Next, let’s look at the earnings growth consistency and expectations. Expected growth estimates can be wrong. In fact, they are frequently overstated, but they can be useful when comparing companies or comparing a company’s performance relative to its industry. MHP’s earnings grew 0.30% over the last five years. Its earnings are expected to grow 10.50% over the next five years, compared to its industry estimates of 16.48%. PSO’s earnings grew 9.07% over the last five years. Its earnings are forecasted to grow 5.10%. SCHL grew 0.88% over the last five years and is expected to grow 9.10% over the next five years. JW-A had the highest earnings growth over the last five years at 11.82%. It is expected to grow 12.50% over the next five years, which means it has the highest of Earnings Growth Estimate of the companies we looked at, as well as the most consistent.
HEDGE FUND OWNERSHIP
Stocks that are favored by hedge funds tend to outperform the market by a few percentage points on the average. Of the companies we looked at, MHP was the most popular. Of the 300+ hedge funds we track, 23 had positions in MHP at the end of the second quarter. JW-A was the next popular at 10, followed by SCHL at 7 and PSO at 1.
THE BOTTOM LINE
After looking at the numbers, we can see the opportunity in MHP. It has strong hedge fund interest, good growth estimates and fairly low volatility, but JW-A also looks good. It is extremely consistent in its earnings growth, has decent hedge fund interest and low volatility. Stocks with a similar profile include Reed Elsevier Plc (RUK), with a 0.71 beta and a forward P/E of 10.79, or Ryanair Holdings Plc (RYAAY), with a 0.48 beta and a forward P/E of 11.73.