Summary
- McGraw Hill reported fiscal 2026 results that beat guidance - $2.1 billion in revenue, $744 million in adjusted EBITDA, and a return to GAAP profitability. The earnings call pivoted hard to AI-powered products as the growth driver.
- The narrative is tidy. The structure is not. The enterprise value is $4.6 billion - nearly double the $2.4 billion market cap - because the company carries roughly $2.2 billion in net debt from its Apollo spinoff. That leverage is the story the earnings call did not lead with.
- No dividend. A $50 million buyback program. In my opinion, that is a capital allocation signal telling you exactly who this company is built for - private equity exit planning, not long-term income investors.
- Q4 revenue declined to $464 million. Higher-ed enrollment is structurally falling. The "AI growth" management celebrates has not been broken out as a separate revenue line, which means the market cannot verify it.
- I rate McGraw Hill (MH) a Sell for investors seeking durable returns. The company is executing a competent deleveraging plan, but the addressable market is shrinking and the balance sheet still dominates the story.
I've been very surprised that McGraw Hill's earnings call framed its fiscal 2026 results as an AI success story. The company returned to profitability, beat revenue guidance, and management spent the call talking about AI-powered adaptive learning tools driving growth. The headline write-ups followed along, as they tend to do.
But here is what is not being said. McGraw Hill's market cap is roughly $2.4 billion. Its enterprise value is $4.6 billion. The difference - roughly $2.2 billion in net debt - is the Apollo spinoff hangover that still dictates the company's capital allocation and risk profile. Every dollar of EBITDA McGraw Hill generates does not flow to shareholders. It flows to creditors first.
That changes how you read every number the company produced.
The EBITDA trap
McGraw Hill delivered $744.3 million in adjusted EBITDA for fiscal 2026 - earnings before interest, taxes, depreciation, and amortization, a rough proxy for operating cash generation. The margin was 35.4%, up nearly 80 basis points year over year. Management is guiding fiscal 2027 adjusted EBITDA to between $750 million and $790 million.
These are solid numbers for a publisher. But adjusted EBITDA does not pay interest. McGraw Hill's interest expense is a material claim on those earnings. When the company finally reported positive net income for the full year - after two years of GAAP losses following its 2024 Apollo spinoff - it took every dollar of that EBITDA growth just to clear the hurdle.
For context, $744 million in EBITDA on $4.6 billion of enterprise value is a yield of about 16% to the total capital base. That is attractive on paper, but the equity slice of that yield is what matters to the stockholder. With a forward P/E of roughly 9.5x and no dividend, the equity return is compressed by the debt overhang.
The AI conversation and what it's hiding
Management told investors that AI-powered products drove revenue growth in the third quarter. Digital revenue hit 85% of total revenue in Q4. Recurring revenue was 81%. These are structural positives - a shift to recurring digital models is real, and it's the right direction.
However, management did not break out AI revenue as a separate line. They did not quantify what percentage of the $2.1 billion is directly attributable to AI products versus the existing digital catalog that simply happens to use AI features. That matters because there is a difference between a company whose AI products are a growth engine and a company whose existing products got a management slide upgrade.
More importantly, the Q4 revenue of $464 million was slightly down year over year. The fourth quarter of the fiscal year - January through March - is the heart of the spring semester, and a decline in that period points directly to the enrollment headwinds that every industry analyst has been warning about. Deloitte and multiple higher-ed trackers have documented a structural decline in college enrollment. Three publishers - McGraw Hill, Pearson, and Cengage - control over 80% of the U.S. college course materials market, which means the entire pie is shrinking.
That being the case, the AI narrative serves a different purpose: it is the story management needs to tell while the structural tailwind turns into a headwind.
Capital allocation tells you the real thesis
McGraw Hill paid no dividend in fiscal 2026. Instead, the board approved a $50 million share repurchase program. For a company that has been burning through debt since its spinoff, a buyback at these levels is a signal. It tells you management believes the stock is worth buying back at approximately $12 per share - down from its IPO highs near $18 - and that returning cash to shareholders through open-market purchases is preferable to establishing a dividend commitment.
In my opinion, that is a false narrative waiting to happen. Buybacks are discretionary. They can be paused next quarter if the balance sheet tightens. Dividends are a commitment. McGraw Hill's choice of buybacks over dividends tells you this is still a private-equity-shaped balance sheet working toward an exit timeline, not a public company built for long-term income investors.
The deleveraging is real - and it has a ceiling
Here is the concession: McGraw Hill has been a disciplined deleverager. The company has cut approximately $646 million in debt since the IPO. Adjusted EBITDA margins are expanding. The recurring revenue shift is structural and durable. These are not management talking points - they are operating results.
The question is whether $750–$790 million in annual EBITDA is enough to carry the remaining balance sheet while the addressable market declines. Management is targeting continued debt reduction, but the math is arithmetic, not optimism. At the midpoint of their 2027 guidance, that's roughly $770 million in EBITDA against $4.6 billion of enterprise value. Getting EV below $3 billion - the level where this stock starts looking like a standalone public company rather than a leveraged spinoff - requires another $600+ million in debt paydown. That would take roughly two more years of strong execution.
Verdict
I rate McGraw Hill as a Sell for income investors and cautious buyers at current levels. The adjusted EBITDA numbers are real, the digital transition is real, and the debt paydown is credible. But the stock trades at 9.5x forward earnings with no dividend, a $2.2 billion net debt burden, and a core addressable market - higher-ed course materials - that is structurally declining as enrollment falls and AI itself threatens to reshape how students consume educational content.
The false narrative is that McGraw Hill is an AI growth story. It is a leveraged cash cow in a shrinking pond, executing a competent deleveraging plan while management sells the AI dream. That is worth something - but it is not worth what the forward multiple implies, and it is certainly not a hold for anyone who needs income or conviction in a growing franchise.
For investors who can tolerate a multi-year horizon and believe the debt will be cleared faster than the enrollment decline bites, there is a contrarian case here. For everyone else, the risk-reward does not justify the position.