Monday, 27 July 2015

McGraw-Hill - good quarter, expensive deal: what price to buy the shares?

I was right to dub the McGraw-Hill Financial stock a 'worth thinking about' moniker in my last formal write-up on the stock in April last year (link here) with the share cruising up from US$75 then to around US$100 today:


Today's quarterly numbers from McGraw-Hill were perfectly solid with strong margin progression across all their key operational units...


...and very strong cash flow ex regulatory and settlement payments (the latter which reduce uncertainty - see previous link for more colour on this aspect of the company's profile).  


However uppermost in the corporate reporting today was the announcement of a significant acquisition by the company of SNL for c. US$2.22bn...


...a business which looks quite complementary with the core McGraw-Hill Financial businesses especially due to the high inherent renewal level: 


What I did note, however, is that the run-rate annualised synergies (in four years time!) are only just over 3% of the total consideration and that on a GAAP basis accretion only comes in 2018.  

To me this indicates a pretty firm underlying price despite some of the benefits noted above. 

Even though some of the consideration is being met via higher domestic US debt (as some of the net cash pile of the company is held overseas) I would still inherently rate McGraw-Hill as an inherent growth business with a good balance sheet - or a c. x14 EV/ebit multiple profile.  Applying this puts the first interesting level for the stock at about US$90 taking into account the deal and some residual regulatory pressures/issues.  That feels like the first level to buy some shares...and I am not surprised to see the stock off 4-5% today on the announcement of good Q2 numbers but a complementary/a bit expensive deal.  

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