McGraw Hill Financial (MHFI) on Tuesday posted first-quarter earnings that beat Wall Street's forecasts by 5 cents a share, but the company, tellingly, didn't lift its earnings forecasts for the year, as the slowdown in global debt issuance continues to hobble its credit ratings business.
The reticence to lift the year's forecasts could speak to the company's cautious outlook, even as its stock--up 31% off the low this year set two months ago--continues to trade in the range of its multiyear high.
Company management, speaking on a conference call following the earnings release, continues to bet that share count reductions via buybacks and cost-cutting initiatives such as job reductions following some expansive acquisitions will bolster per share performance, but management didn't sound optimistic about changes in global economic fundamentals that would bolster its organic growth.
The majority of McGraw Hill Financial's profitability comes from its credit rating and indices businesses, which saw mixed results, with volatility in the breadth of the capital markets hurting Standard & Poor's credit rating business.
Revenue at the ratings service declined 9% in the quarter, while operating profit from the critical business slid 12%. Management noted a 14% decline in global issuance of debt during the period, marking a fourth consecutive quarterly drop. Some areas of the credit market--especially in the riskier high-yield spectrum--plunged even more dramatically in the first quarter.
The company's indices business, however, reported a 5% increase in revenue, as market volatility boosted trading activity, especially in instruments tied to equity market volatility--the so-called "fear" indicators--during the period. Going forward, though, there's no guarantee the benefits of volatility will be replicated. The most widely watched indicator of volatility--the VIX--has fallen more than 50% from the February high for the year as equity markets have stabilized over the past two months.
Meanwhile, management said its buyback activity reduced share count by 9 million in the first quarter. McGraw Hill spent $200 million buying back its own stock in the quarter and paid $96 million in a dividend. The company has agreed to expand its stock repurchase authorization to 33 million shares.
On the conference call, management said it was sticking with its full-year guidance for earnings of $5 to $5.15 a share. Given some hesitation coming into the report that the weakness in the global debt market would impinge on results, the outlook has provided some assurance to shareholders. The stock on Tuesday morning was up $2.90, or 2.8%, to $106.06, near the multiyear high of $107.79 reached last May.
McGraw Hill Financial, which was effectively reformulated three years ago from the former McGraw Hill, continue to recast itself. Last August, the company bought the SNL Financial data and analytics business for $2.2 billion, and it recently said it would sell its J.D. Power & Associates operation for $1.1 billion. Another, albeit cosmetic, change is coming as well, as the company prepares to rebrand itself S&P Global and will begin trading under the ticker symbol SPGI.