McGraw-Hill Profit Rises on Demand for Credit Ratings, Funds

McGraw-Hill Cos., the finance and publishing company that’s splitting in two, said first-quarter profit rose 2.5 percent on increased demand for Standard & Poor’s credit-ratings and index funds.

Net income from continuing operations rose to $123 million, or 43 cents a share, from $120 million, or 39 cents, a year earlier, the New York-based company said today in a statement. Excluding costs related to the split of the company, McGraw Hill earned 51 cents a share, beating the 48-cent average of seven analyst estimates compiled by Bloomberg.

McGraw-Hill, the owner of Standard & Poor’s, said Sept. 12 it will break into two companies, one focused on financial information and the other on educational publishing, by the end of this year. The company’s credit-ratings business is benefitting as U.S. debt issuance rose 9.8 percent in the first quarter over last year.

“Revenues here were strong” in the credit-rating business, said Douglas Arthur, an analyst with Evercore Partners Inc. in New York. He estimated the company would earn 50 cents a share on an adjusted basis.

McGraw-Hill fell 1 percent to $48.63 at 9:45 a.m. in New York. The shares had gained 9.2 percent this year before today.

The company kept its 2012 earnings forecast of $3.25 to $3.35 a share. It didn’t announce an update to its proposal to split the S&P unit from the education business except to say the plan is progressing. Expenses rose 6.2 percent to $1.1 billion, the company said.

S&P Spiders

The company’s S&P index funds, called SPDRs, or Spiders, are becoming more popular with investors, Peter Appert, an analyst with Piper Jaffray & Co. in San Francisco, said before the results were released.

“The index business has become phenomenal,” said Appert, who rates the stock overweight. “They get paid every time someone trades an S&P spider. Assets are shifting to exchange-traded funds. They really dominate the U.S. index market.”

First-quarter revenue rose 5.6 percent to $1.33 billion, up from $1.26 billion a year earlier, McGraw-Hill said.

The company began a strategic review in 2010 of the company’s businesses. On Aug. 22, Jana Partners LLC, a New York-based hedge fund and investor in the company, proposed a plan to break up McGraw-Hill after education revenue fell for three straight quarters.

Investors are now waiting to hear the details of the split, Appert said. Those need to be unveiled soon to give the U.S. Securities and Exchange Commission enough time to approve the break-up before then end of the year, he said.

“What we’re all on the edges of our seats waiting for is the document that will lay out the structure of the deal,” he said. “We don’t know what the capital structure will be. How much debt grows with the education company, how much cash goes with the education company. That’s what we will need to see.”

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