Standard & Poor’s has been in the news lately for its Aug. 6 decision to downgrade the United States’ debt rating from AAA to AA+. What you might not have realized is that its parent company, McGraw-Hill (NYSE:MHP) could be a beneficiary of all the attention directed toward S&P. But should you buy McGraw-Hill stock?

S&P is the biggest division of McGraw-Hill, accounting for 32% of its revenues and a whopping 62% of its operating income for the first half of 2011. And S&P has been growing smartly at 15% in the first half of 2011. So if you believe there is no such thing as bad publicity, S&P is nearly drowning in a pool of economic delight.

Here are three reasons to consider investing in its stock:

• Good quarterly earnings. McGraw-Hill has been able surpass analysts’ expectations at a pretty consistent rate and has done so in all of its past five earnings reports. In its most recent report, it beat analysts’ expectations of 67 cents per share by a penny.
• Decent dividend. McGraw-Hill’s annual dividend of $1 gives a yield of 2.65% — better than what you’d earn in a bank account.
• Out-earning its cost of capital. McGraw-Hill is earning more than its cost of capital — and it’s improving. How so? It produced positive EVA momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first six months of 2011, McGraw-Hill’s EVA momentum was 2%, based on first six months’ 2010 annualized revenue of $5.3 billion, and EVA that rose from $1.7 billion annualizing the first six months of 2010 to $1.8 billion annualizing the first six months of 2011, using a 9% weighted average cost of capital

Two reasons to pause:

• High valuation. Its price/earnings-to-growth ratio is 1.31 (where a PEG of 1.0 is considered fairly priced). This means the stock is somewhat overpriced. It currently has a P/E of 13.59 and is expected to grow about 10.41% in 2012.
• Declining sales and profits with stronger balance sheet. McGraw-Hill has been shrinking sales and profits. Its $6.2 billion in revenues have declined at an average rate of 0.4% over the past five years while its net income of $828 million has fallen at a 1.6% annual rate during that period — yielding a solid 13% net profit margin. Its debt has stayed steady at $1.2 billion, while its cash has zoomed up at a 74.5% annual rate from $353 million (2006) to $1.5 billion (2010).

McGraw-Hill looks like a strong company whose stock is slightly overvalued. Thanks to S&P’s downgrade of the U.S. — that ironically helped contribute to a rally in the 10-year U.S. bond that drove its interest rate down 29% in the last six weeks — we might get another market swoon that makes McGraw-Hill’s stock more attractively priced.

Peter Cohan has no financial interest in the securities mentioned.