Bloomberg News

McGraw-Hill Net Rises 25% on Demand for Debt Ratings (Update3)

July 24, 2007

McGraw-Hill Cos. (MHP:US), the publisher of Business Week, said second-quarter profit climbed 25 percent as demand rose for Standard & Poor's debt ratings. The shares fell the most in more than two years after the company said S&P growth will slow in the second half.

Net income (MHP:US) increased to $277.1 million, or 79 cents a share, from $221 million, or 60 cents, a year earlier, New York-based McGraw-Hill said today in a statement. Sales gained 12 percent to $1.72 billion.

Growth at S&P, its most profitable unit, will slow in the second half from the ``very, very hot'' first half, Chief Executive Officer Terry McGraw said today on a conference call. McGraw-Hill, also the owner of market researcher J.D. Power & Associates, has depended on S&P to boost results, benefiting from increased sales of collateralized debt obligations, or CDOs.

``The feeling is that growth is going to slow and that's not surprising,'' said Ed Atorino, an analyst at Benchmark Co. in New York, who has a ``buy'' rating on McGraw-Hill shares and doesn't own them. ``Some people didn't like to hear that.''

Foreign exchange rates boosted sales in the second quarter by $16.8 million, the company said. The results beat the average $1.68 billion sales estimate (MHP:US) of four analysts in a Bloomberg survey.

Shares of McGraw-Hill fell $3.58, or 5.7 percent, to $59.79 at 4:02 p.m. in New York Stock Exchange composite trading (MHP:US), the most since March 2005. They have gained 19 percent in the past year.

Lower Rate

S&P growth will be in the ``double digits'' for the rest of the year, ``albeit, it's going to be at a lower rate,'' McGraw said. The effect on results from defaults in the subprime mortgage market will be offset by the strength in overall corporate finance globally.

Sales at the company's financial services unit rose 21 percent in the quarter to $821 million from a year earlier, driven by demand for fixed-income and equity information services in domestic and international markets. Operating profit grew 28 percent to $401.4 million.

The education division had revenue of $647.3 million, a 5.8 percent increase compared with the previous year. Operating profit rose 19 percent to $80.4 million.

At the information and media unit, sales rose 4.7 percent to $249.9 million, while operating profit rose 14 percent to $14.7 million. The division benefited from the change in accounting of Sweets from a print catalog to a print and online service for the construction industry.

Subprime Defaults

McGraw-Hill's stock has fallen almost 7 percent this year (MHP:US), partly on concern that subprime mortgage defaults might slow demand for ratings of CDOs. Shares of rival Moody's Corp. (MCO:US) have declined 15 percent in the same period.

Short interest in shares of McGraw-Hill and Moody's jumped in the past month, a signal investors are betting credit-rating services will be hurt.

The short interest on McGraw-Hill rose 7.8 percent in early July to 6.3 million shares from a month earlier. Short interest on New York-based Moody's was 23 million shares, up 28 percent, according to data compiled by Bloomberg.

To contact the reporter on this story: Gillian Wee in New York at gwee3@bloomberg.net.

To contact the editor responsible for this story: Jennifer Sondag at jsondag@bloomberg.net.


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