Monday, September 8, 2008

Stock Analysis: McGraw-Hill Companies Inc (MHP)

Linked here is a PDF copy of my detailed analysis of McGraw-Hill Companies Inc (MHP) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: The McGraw-Hill Companies Inc. is a leading information services organization serves worldwide markets in education, business, industry, other professions and government.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

  1. Avg. High Yield Price
  2. 20-Year DCF Price
  3. Avg. P/E Price
  4. Graham Number
MHP is trading at a discount to 1.), 2.) and 3.) above. Since MHP's tangible book value is not meaningful, a Graham number can not be calculated. If I exclude the high and low valuations and average the remaining two, MHP is trading at a 11.7% discount. MHP earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:
  1. Rolling 4-yr Div. > 15%
  2. Dividend Growth Rate
  3. Years of Div. Growth
  4. 1-Yr. > 5-Yr Growth
  5. Payout 15% of avg.
MHP earned one Star in this section for 3.) above. MHP has paid a cash dividend to shareholders every year since 1937 and has increased its dividend payments for 35 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
  1. NPV MMA Diff.
  2. Years to >MMA
MHP earned no Stars in this section, and had one Star deducted for a negative NPV MMA Diff. The negative NPV MMA Diff. means that on a NPV basis for every $1,000 invested in MHP you would earn $2,310 less than a MMA earning a 20-year average rate of 4.61%. If MHP grows its dividend at 7.3% per year, it will never equal the cumulative earnings from a MMA yielding an estimated 20-year average rate of 4.61%.

Other: MHP is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. MHP noted in its 2007 10-K report filed with the SEC in February 2008 that among the risks facing its businesses are the level of educational funding both domestically and internationally, and the health of capital and equity markets, including future interest rate changes.

Conclusion: MHP earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and lost one Star in the Dividend Income vs. MMA section for a net total of one Star. This quantitatively ranks MHP as a 1 Star-Very Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would have to drop to $24.91 before MHP's NPV MMA Diff. decreases to the $3,000 NPV MMA Diff. that I like to see. At that price MHP would yield 3.53%. MHP will not be joining my dividend income portfolio in the near-term.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I had no position in MHP (0.0% of my Income Portfolio) .

What are your thoughts on MHP?


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13 comments:

  1. Thanks for the analysis D4L. I've never looked into McGraw-Hill so my thoughts are prety much non-existant on this one

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  2. im no expert, but ur analysis is pretty lame IMO. Your missing on the best opportunities if you truly belive int his method

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  3. Anonymous,

    I would love to learn why this method is lame.
    In addition to that, could you give me an example of a lost opportunity that D4L is missing? I hope those "lost" opportunities are not anonymous or secretive.

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  4. NO they are not, and this company is in front of your face.. You can value stocks however you like. YOu want to value the price you should pay for the business' ongoing operations and you do not get anywhere using metrics such as P/E in your calculations. Its no secret, use your brain a little, if you use a different method than Discounting Future cashflows your going to dismiss some opportunities.


    Benjamin Graham himself later dismissed the reliability of using these metrics such as Price to Book and such.. its not a secret!

    ReplyDelete
  5. For the record, the analysis includes a DCF that shows the stock is trading at a discount. In fact it is trading to a discount to all the valuations I use except the Graham number. I would consider MHP a value buy.

    However, I am looking for more than a value buy, I am looking for a stock that is a good value and a good dividend investment. MHP comes up short on the latter.

    Best Wishes,
    D4L

    ReplyDelete
  6. The easiest thing to do is bash at others work, without providing alternatives for investing in other assets.

    The difference between most paid analysts and the individual contributors on Div-Net is that most analysts on Div-Net actually follow the advice on the articles that they publish themselves and use their own heads to earn/lose their own money.

    There are many different ways to value stocks, and telling me that his way is bad doesn't necessarily make it bad - your point actually loses its credibility this way.

    Since I am always open on learning new ideas, I would love it if Anon could share a value stock pick with us as well as the reasons why he selected it.

    ReplyDelete
  7. Im sorry if my post seemed bashful, I should have respected your methods regardless.

    I am glad that you have taken the high road and are open-minded (something I am not..most of the time).

    I understand you are looking for Dividends as your criteria. But I will state my opinions on this for the record: there are other schools of thaught that would disagree with this method. For #1, Fisher mentions this, huge & Wonderful businesses that withhold a significant chunk of dividends(given you select the right enterprise, for example, MHP could be one) will re-invest those dividends and pay you many-times over in the long-run by remaining RELEVANT and EXERCISING their moats.

    You want another example? Berkshire Hathaway, is the best example that I can give you because I do believe Warren Buffet would re-invest those dividends at superior rates.

    Anyhow, like I said, relying too heavily on P/e, P/B etc for VALUING the price you should pay, is still very dangerous IMO

    Investing should be , easy and simple on the math side! And forgive me for agreeing with Buffet, playing too much on your IQ with Valuing a stock just isn't "too smart".

    I would spend my time posting about how MHP may still be a risky bet given that directors are not forced to retain shares and Management is compensated heavily on Diluted EPS which there could be reason for conflict. Why? They are buying massive amounts of shares back.
    And Fyi: Share buybacks affect P/B and all your other metrics that you've used in valuing which is why I said I find them lame.

    I respect you views, which is why I am taking the time to post this respectfully.

    ReplyDelete
  8. Im going to mention this again before I get flamed :) Im sorry for having overlooked your investment methodology, I actually ADMIRE your site (or I wouldn't have left a post).

    I believe it is courageous and AND generous to detail to inform and detail the public about Investing as OPPOSED to gambling in the market. You folks obviously aren't speculators and have a realistic grasp of business investing, that is , for the long-term.

    ReplyDelete
  9. here's an excerpt from Fisher's Book:

    It is well to remember that during the past thirty-five years numerous studies have been made by various financial authorities. These have compared the results obtained from the purchase of common stocks which afford a high dividend yield with those obtained from the purchase of Low-yield stocks of companies that have concentrated on growth and reinvestment of assets. As far as I know, everyone of these studies has shown the same trend. The growth stocks, over a five - or ten- year span have proven spectacularly better so far as their increase in capital value is concerned.

    And even more interestingly (this follows the objective of D4L), "in the same time span such stocks have usually so increased their dividends that, while still paying a low return in relation to the enhanced value at which they were by then selling, they were by this time paying a greater dividend return on their original investment than were stocks selected for their yield metrics.

    Here's another summary: "the growth stocks had not only shown marked superiority in the field of capital appreciation, but given a reasonable time, they had grown to a point where they showed superiority in the matter of dividend return as well"(Fisher, 88-89).


    Whew.. that was long, Im not going to say anymore. If your going to dismiss this than I have nothing ELSE to contribute.

    Sincerely, Anonymous

    ReplyDelete
  10. Anon: No flame taken or intended on my part. I don't necessarily disagree with anything you posted.

    My income portfolio is just a subset of my total portfolio, and is the portion I have chosen to blog about. I have a portion that focuses on capital appreciation. I tend to utilize more mutual funds and ETFs in it, but I am holding some individual stocks.

    For me, I find dividend/income investing more interesting, so that's where I spend my time.

    If you continue to post comments, and I would encourage you to do so, you might want to adopt a named persona by selecting the "name/url" option (you can leave url blank). You can remain anonymous but give yourself a name such as "Superior Rates". The generic "Anonymous" option is sometimes ignored since it is often used as a "drive-by-shooting" option.

    Thank you for taking the time to fully express your views.

    Best Wishes,
    D4L

    ReplyDelete
  11. Awesome, my first times here, still getting accustomed to the interface hehe,

    Thank you D4L your a very saavy, I appreciate your quick response!

    Sincerely

    ReplyDelete
  12. Anon,

    Actually I appreciated your comments and found them very thought provoking. Sometimes in investing there's not a right or wrong answer. Theoretically a company that generates large returns on investment should re-invest in their business which will grow exponentially. There are great examples of this strategy working over the long run ( like the ones you mentioned)

    However there are also many times when re-investing in the business decreases the overall return on investments because of size limitations for example.

    I would also encourage you to have a name/url instead of anonymous so that we could refer to you easily. ( I think we had several anonumous users, and I didn't know if it was jsut one user or many)

    ReplyDelete
  13. Tyler "aka the anonymous poster on this page"September 26, 2008 at 9:51 PM

    Thanks again D4L. Your absolutely right about a company's size and its limitations. WELL SAID

    I've never considered this POV. Thank you for being nice enough to respond.

    I'll be using Tyler for identification from now on hehe.

    I wish you the best !

    Sincerely

    ReplyDelete

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