market folly

At Invest For Kids Chicago yesterday, Barry Rosenstein of JANA Partners gave a presentation on going long McGraw-Hill (MHP).

Be sure to check out all notes from Invest For Kids Chicago where numerous high profile hedge fund managers shared their latest investment ideas.


Long McGraw-Hill (MHP)

Rosenstein is a private equity style investor in public markets and he likes finding undervalued companies. He compares MHP to the classic 1980's style "sleepy business." The ratings segment sees $800 million of EBIT and has moat and pricing power. The financial services, Capital IQ and Ratings Direct segment has $175 million EBIT, while educational business segment has $300 million of EBIT.

He focused on the company's capital allocation as the educational business is more capital intensive but has a lower return on invested capital and garners the lowest multiple. He says the company has starved this business so they've lost market share.

He dislikes the bloated conglomerate structure and partnered with the Ontario Teachers' Pension Plan to go activist on MHP. Not surprisingly, the company is spinning out its education business and accelerating stock buybacks.

We've also previously detailed Rosenstein's slideshow presentation on MHP on why the company should split up. He says the company's cost cuts should be $200 million rather than $100 million and buyback $1 billion in 2011 and 2012 (15% of total shares).

The risk he pointed out was litigation issues of the ratings business and he said only a small fraction of claims are making it into court as the courts denied class action status to claims. He sees 40% upside to today's price.

You can view full notes from Invest For Kids Chicago here.