Goldman and Jeffries are both excited about McGraw Hill (MHP). Goldman added the stock to its Conviction Buy List and sees a 20%+ upside to their upwardly revised $51 price target. Goldman sees a particularly compelling risk/reward, citing these 3 areas as the source of opportunity:
(1) new issue volume trends (bonds) that appear to be getting “less bad”
(2) evidence that the company is successfully navigating the current financial market turmoil while protecting margins
(3) a valuation close to a multi-year low
Key risks to McGraw-Hill were cited by Goldman as:
(1) cyclical weakness in new issue bond volume
(2) regulatory/litigation risk given credit market turmoil
(3) educational funding
Goldman, however, believes none of these risks will significantly impact MHP in the near future. The firm believes that the headwinds facing rating agencies are cyclical in nature and that there will not be “a structural change in industry economics.” Furthermore, Goldman believes the regulatory/legislative risks are overestimated and are creating more “headline risk” than actual risk.
Jeffries also is optimistic and initiated at BUY at a $49 price target. Jeffries see the the downturn in credit markets as having already been completely priced into the stock. They expect the stock to climb as liquidity returns to the credit markets.