McGraw-Hill Feasts on Derivatives Ratings

Earnings rose smartly in McGraw-Hill's ( MHP) second quarter, reflecting solid growth at its financial-ratings arm that sheds some light on activity in world financial markets.

The New York company earned $165.6 million, or 86 cents a share, in the three months to June 30, compared with earnings of $142.0 million, or 74 cents a share, last year. Revenue rose 5% to $1.23 billion. Analysts had been forecasting earnings of 81 cents a share on revenue of $1.23 billion in the quarter.

Looking ahead, McGraw-Hill expects full-year operating earnings growth in the high single digits, up from its old forecast for growth in the mid- to high single digits.

Revenue in the company's largest segment, education, dipped 2% from a year ago to $531.7 million, while operating profit in the segment rose 2.6% to $57.1 million. The revenue decrease included a 6.7% decline in the McGraw-Hill School Education Group, reflecting reduced sales to states and a timing issue that skewed the year-over-year comparison.

Because McGraw-Hill owns Standard & Poor's, its segment results serve as an indirect proxy on world securities activity. The segment's revenue rose 14.8% from a year ago to $504.5 million, while operating profit shot up 24.9% to $214.2 million.

Despite a declining U.S. new-issues market, the division managed a big quarter because of strength in structured finance, which comprise derivatives used to offset asset fluctuations as well as for straight up market wagering by hedge funds.

"In the United States, residential mortgage-backed and commercial mortgage-backed securitizations were particularly strong, as structured finance repeated its usual quarterly pattern with a surge of activity in the final month of the quarter," the company said.

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