McGraw-Hill (MHP)
Gents -- I know this is going to get some "ick" reactions, but what do you think about McGraw-Hill (MHP)?
Here's what I see:
FD WASO: 290.5m [including RSUs + Options]
$/sh: $45
Market Cap: $13.0bn
$1,250m for 3Q-12A Cash
Less: $400m for repayment of 2012 Notes
Less: $700m for Special Dividend of $2.5/sh on 280m shares outstanding
Plus: $1,900m for Education Biz Sale [let's ignore the $250m Seller Note from Apollo]
Plus: $250m for 4Q-2012E FCF
Cash: $2,300m
Less: $800m for 4Q-12E Debt
Net Cash: $1,500m
Enterprise Value @ 4Q-12E: $11.5bn
Less: $1,000m for 2013E FCF
Plus: $5,000m for Settlements w/ DoJ and other International Authorities (1)
Enterprise Value @ 4Q-13E: $15.5bn
For a business that generates $1bn in annual FCF, growing at +10%, this Company should trade much, much higher than a 6.5% after-tax cap rate (i.e. almost 10% pre-tax cap rate) unless you believe the fundamental economics of the business are impaired by the DoJ's allegations (and the resulting treble effects on other rating agencies).
I believe that the status quo is too powerful to overcome, and that the analysis of complex credits will remain as lucrative as it always has been (my thoughts are more nuanced than this, but I want to make my opinions plainspoken).
MHP's situation reminds me very much of Goldman's not ~12 months ago... i.e. $90/sh --> $145/sh and rising.
I've read the DoJ document and, notwithstanding some poorly conceived gallows humor and sarcastic emails by junior employees, S&P's actions DO NOT resemble anything close to fraud or predatory intent.Obviously that will not neither stop the Company from being a political pinata over the next 6-12 months nor save them from settlements totaling in the billions of $'s, but at some point this becomes "priced-into" the stock.
Happy investing.
(1) I believe MHP will settle for much less than $5bn, but I'm putting this in as a strawman. |
